VAT on a pub renovation/conversion

[guyspartacus]

I'm getting nowhere with this to be honest!

 

I've spoken with HMRC who state that it is a decision between me and the contractor as to what rate of VAT applies to my project. I tried to argue that when I apply for a refund of 15% on materials, then it becomes their decision but it got me nowhere.

 

According to VAT notice 708 - 5.3.1;

* Public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self-contained - normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas

 

This applies to my property which means that it is not currently a 'single household dwelling' due to the above clause. Now, According to VAT notice 708 - 7.3, reduced rate applies if;

 

A qualifying conversion is carried out when the premises being converted is a building, or part of a building, and after the conversion the premises contains a greater or lower number (but not less than one) of ‘single household dwellings’ (see paragraph 14.4), but not where the number of ‘single household dwellings’ in part of the premises is unchanged (see paragraph 7.3.1).

A qualifying conversion includes the conversion of:

• a property that has never been lived in, such as an office block or a barn
• a multiple occupancy building such as a bedsit block
• living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
• any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice

 

So - as it is my decision, I can pay reduced rate to any contractor I employ for any works to install building materials (as well as reclaim 15% of the VAT paid for said materials) - except for carpets, appliances and the myriad other things not deemed 'building materials'.

 

Am I going to have problems claiming back the VAT paid on materials if I'm purchasing them myself and paying a contractor to install them?

 

Thanks,

 

[nod]

Unless you are employing a main contractor there is no incentive for individual contractors to get involved in claiming vat back on materials 

You are better contracting the conversion out on a Labour only basis 

Which will allow you to claim any vat owed on completion 

[newhome]

You won’t be reclaiming 15% on materials. For ‘eligible conversions’ you will be charged 5% VAT by VAT registered builders for labour and supply & fit jobs. Your builder will need to be satisfied that your conversion meets the criteria to charge 5% VAT. It’s his decision, not yours, as it’s his risk if HMRC don’t accept the criteria he puts forward in his VAT return (although he could still come after you for the underpaid VAT if HMRC reject the 5% criteria). 
 

If you buy materials yourself you need to pay 20% VAT. 

 

If your conversion is eligible you can reclaim the VAT paid; both the 5% paid to the contractor and the 20% paid on materials purchased yourself. I don’t think that your project will qualify for the reclaim scheme however due to this section in the reclaim form notes:
 

Have you carried out works to a building that has previously been lived in?

A building has been lived in if it has previously been used as a dwelling. This means that the building has been adapted or designed for use as someone’s home and has been used in this way. The living accommodation need not have been self­contained or designed to modern standards. Buildings that have been used as dwellings will not only include houses and blocks of flats but will also include the following:

public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self­contained – normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas

 

The conversion of any of these types of property will not be eligible under the Scheme unless the 10­ year rule applies 

 

 

[guyspartacus]

17 minutes ago, nod said:

Unless you are employing a main contractor there is no incentive for individual contractors to get involved in claiming vat back on materials 

You are better contracting the conversion out on a Labour only basis 

Which will allow you to claim any vat owed on completion 

This was my plan - but then newhome suggests I wouldn't be able to?

 

 

[Temp]

5 hours ago, guyspartacus said:

According to VAT notice 708 - 5.3.1;

* Public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self-contained - normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas

 

This applies to my property..

 

I've had same issue with HMRC, they wont give advice "before the fact". You may have to pay an accountant familiar with this area.

 

The full wording of that para says...

 

5.3.1 The meaning of ‘use as a dwelling’

A building is ‘used as a dwelling’ when it has been designed or adapted for use as someone’s home and is so used. The living accommodation need not have been self-contained or to modern standards. So, buildings that have been ‘used as a dwelling’, include:

public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self-contained - normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas

bedsit accommodation

crofts

If you convert these types of property into a building ‘designed as a dwelling or number of dwellings’, or intended for use solely for a ‘relevant residential purpose’, then, unless the 10-year rule applies, your sale of, or long lease in, the property cannot be zero-rated and is exempt from VAT.

 

My understanding is that there is a difference between developments that are zero rated and developments that are exempt from VAT. I believe the latter cannot reclaim "input vat". 

 

I recall reading there is an "option to tax" which makes the sale potentially liable for vat rather than exempt. I think this allows input vat to be reclaimed. Then when the sale is made vat is charged at zero % which is the rate for a dwelling. Something like that anyway. Sorry I'm not an expert.

 

Something similar applies to a build to let property. They are also exempt (rather than zero rated) so vat on materials cannot be reclaimed without a similar trick?

 

[Temp]

Perhaps I'm wrong above...

https://vatexchange.co.uk/commercial-property/vat-converting-pubs-commercial-property/

Converting a pub 

Before the conversion, the downstairs was the public and the landlord and family lived upstairs.  There’s a bathroom and other rooms used as a living room and bathrooms, but it isn’t a self-contained dwelling, so isn’t regarded as a “single household dwelling”.  But because the manager and his family lived in those rooms before the conversion, the property has been “used as a dwelling”.

So what does this mean for VAT purposes? 

• Because the upstairs wasn’t a self-contained dwelling means that the conversion of all or part of the property into a “single household dwelling” would qualify for reduced rate contractors’ services, whether you’re converting the property for personal use or for business purposes.

• However, because the property has been “used asa dwelling“ within the prior 10 years means that DIY home developers can’t claim VAT under the DIY refund scheme, while property developers cannot claim VAT on the costs even if they sell the freehold or long leasehold in the property.
•  

[guyspartacus]

Thanks.

 

Say I find a friendly builder that’s VAT registered, surely I can pay him labour only and pay his invoices for materials?

 

Would he then claim back the additional VAT on the materials?

[PeterW]

No because he would have to show that he was using the materials that he was reclaiming for on zero rated contract work to HMRC in the event of a VAT inspection. The risk would be his too, and the penalties are severe !!

[Temp]

Whole area appears to be a bit of a mine field.  

 

Did you manage to avoid paying VAT when you purchased the pub? or did you issue a certificate 1614D? Neither?

[Temp]

Having poured over VAT 708 again I agree it qualifies for reduced rating under section 7 "Reduced rating the conversion of premises to a different residential use". That's on the basis that the number of "single household dwellings" (as defined in para 14.4.1) will increase from zero to one. So a contractor should charge you 5% VAT on labour and materials. 

 

However because its also a "building used as a dwelling" I don't think you can use the self build reclaim scheme to recover the 5% you pay the contractor or the 20% you pay on materials you buy yourself. So as you suggest you should get the contractor to buy everything and deal with the VAT.

 

As others have said you may find it hard getting a contractor to charge 5% VAT on everything. Para 7.1.2 refers to a certificate (which is essentially a letter to the contractor stating that its a qualifying building so he should reduce rate). I don't believe you are required to give him one but others have found it can help. There is an example certificate in para 18 but you will need to edit it down to remove all the guff about charities etc and to to state that it qualifies for reduced rating citing paragraphs 7,  7.1.2,  7.3 and 14.4.1.  I think some people here have already done something similar.

 

This is such a tricky area you really should take proper advice. I'm not an accountant.

 

 

 

 

 

 

 

 

Edited July 9, 2020 by Temp

[guyspartacus]

4 hours ago, PeterW said:

No because he would have to show that he was using the materials that he was reclaiming for on zero rated contract work to HMRC in the event of a VAT inspection. The risk would be his too, and the penalties are severe !!

But he would be using the materials on my project - only that I would have paid for them.

 

Seems slightly odd that I can pay5% VAT for a contractor to supply and fit (and put a markup on materials), yet can’t do the same if I’m managing it myself?

[newhome]

1 hour ago, guyspartacus said:

Seems slightly odd that I can pay5% VAT for a contractor to supply and fit (and put a markup on materials), yet can’t do the same if I’m managing it myself?

That’s just the way it is though. Everyone who is renovating a dwelling that has been empty for more than 2 years also has this constraint, ie they have to use a VAT registered builder to benefit from any VAT reduction.