Property VAT Guide
To understand the Property VAT rules it is important that you understand the normal VAT rules. The difference between a zero rated and exempt supply is particularly important. If you are unclear then read my short guide to the basics of VAT first. SeeVAT Basics
I can provide advice on the VAT treatment of your property transactions. See Property VAT Advice
Residential Property VAT Guide
When you sell or rent an existing residential property such as a house or flat then you will normally be making a VAT exempt supply. This means you don’t charge VAT but cannot recover the VAT you incur on your purchases relating to it. If your only business activity is letting domestic property then you cannot register for VAT. Equally of course you will not be charged VATwhen you buy the property so there wont be so much VAT to recover.
If you construct a new domestic property and then sell the Freehold you will make a zero rated supply. This means you can recover VAT on construction costs. Although if you use a third party builder they will not have charged you VAT on their construction. This means that the main VAT you will be recovering is on other costs such as planning and architects fees.
If you construct a new domestic property and let it you will be making an exempt supply. This means you will not be able to recover the VAT you were charged on your costs.
If you build a new residential property intending to sell either a under a freehold or a long lease but change your mind and let it on a short-term lease then you may have to refund some of the VAT you have recovered on the project.
HMRC summarise thees rules in an official notice. See Section 3 of the Land and Property Notice
When you convert a property that is not currently used for residential purposes – such as a barn or a pub, then the VAT rules are more complicated. Your sale maybe exempt or zero rated or a mixture of the two – it depends upon what is converted. This VAT liability will determine how much VAT you can recover.
There is a 5% reduced rate of VAT that applies to some conversion work. However many contractors play safe and try and charge the standard rate of 20% on all their projects regardless. In such cases you made need to persuade them as to the correct VAT treatment and in this case it may pay to use a VAT advisor. To be fair to builders the VAT rules are rather complex.
Some conversions such as pub conversions are further complicated by the VAT treatment of the sale of the building to the person converting. The building might be purchased as a VAT free transfer of a going concern (TOGC) or part (normally 10%) may have been treated as VAT exempt if there is living accommodation above. There are a number of traps to be aware of and it will pay to take advice. Contact me if you would like to discuss any project.
Holiday Accommodation VAT
Holiday accommodation has a special VAT treatment . The purchase of new holiday lets are usually subject to VAT, although you may be able to eventually sell the building free of VAT. Holiday home owners can often register for VAT and recover the VAT they are charged but again it pays to take advice as HMRC sometimes attempt to incorrectly restrict VAT registration and recovery. HMRC give their view on the subject in their Holiday Accommodation Notice
Commercial Property VAT Guide
Supplies of commercial property are by default VAT exempt but there are exceptions which means that VAT is often charged. One reason is that freehold sales of new commercial buildings are automatically subject to VAT. But the main reason why VAT is charged on commercial property is the VAT option to tax. The majority (by value) of UK commercial property has been opted to tax.
What is an Option To Tax
When you opt to tax you are deciding to charge VAT on all supplies you make of a commercial property or land of at least 20 years. You must notify HMRC of your option to tax and in some cases they must give permission. The option to tax does not apply to residential property.
The reason properties are opted is that it allows landlords to recover VAT. As in practice most businesses can recover VAT they don’t worry too much about it being charged on rent. This will not be true of all tenants. Some such as charities, medical service providers, education providers or finance companies cannot recover VAT. If a building is likely to occupied by this type of client then opting may not be a good idea.
When the Option wont apply
There are some situations where an option to tax will not apply, and the supply reverts to being VAT exempt, such as when the building will be used for a residential or charitable purpose. There are also exceptions designed to prevent tax avoidance.
Common Option to Tax Mistake
A very common misunderstanding about the option to tax is to assume it is automatically transferred when you buy a building or site. It is not. If you buy a building with an option in place then you must make the decision whether you wish to opt.
If you just assume the option transfers and recover VAT on this basis this can prove both costly and difficult to correct. There are a great many rules that govern the option to tax and it often pays to take advice. If you have not opted and yet realise you should have done it is sometimes possible to retrieve the situation with care.
The HMRC Option to Tax Notice gives information on how to opt to tax.
Transfer of a Going Concern
Where you sell a building as part of a functioning business the sale may be outside the scope of VAT (this is different from exempt and zero rating – see VAT basics) providing certain rules are kept to. This treatment can apply to empty buildings that will be let.
Work to Buildings
Most work relating to land or buildings such as construction services or architects fees are subject to VAT at 20%. There are exceptions. Work converting buildings to residential use or changing the nature of a residential building can in some cases be subject to 5% VAT. Work making a building suitable for the disabled can be subject to zero rate VAT. This is an area it pays to take advice. See Property VAT Advice
This is a very brief and basic property VAT guide. If you have any question or scenarios you want to discuss then get in touch. I won’t charge for an initial chat. Contact me here