VAT 5% or Zero? And some other questions from a newbie.

[Bird]

I've got a commercial property purchased through a new limited company which has PP to convert to residential.  It's been empty for 2 years, but not the years prior to PP being granted.

My intention is to rent out the property, even holiday let if there isn't some restriction, but would move in if there is some other restriction.

 

I have a builder lined up to do the conversion and I told him I am eligible for the reduced 5% VAT rate - He's asked for a certificate.  I've found VAT Notice 708 documentation quite confusing to read and doesn't specifically address my case.

 

1. This 5% rate does apply to limited companies, not just individuals.

2. If my limited company registers for VAT, can it avoid the VAT charge altogether?

3. Are there restrictions on sale of the property after claiming reduced rate?

4. Are there restrictions on the use of the property after claiming reduced rate, for example short holiday rents?

5. Since I'm just making up a certificate and handing it to the builder, how does HMRC know I'm not evading tax?  Is the builder accountable for this once he's accepted my certificate?

 

Thanks!

 

[nod]

No

[Bird]

49 minutes ago, nod said:

No

To which question?

[nod]

Limited companies don’t get any special treatment when it comes to vat 

[Bird]

4 hours ago, nod said:

Limited companies don’t get any special treatment when it comes to vat 

 

Are you certain of this? I haven't found any specific reference to limited companies in the official guidance https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708 but it does seem relevant to "developers", which is defined as the one who has commissioned the conversion.

 

The following articles also seem to indicate the limited companies are eligible for this rate, unless something has since changed in the rules since written.

 

https://www.taxinsider.co.uk/what-does-the-vat-rate-on-building-works-apply-to-ta

This refers to a business-owned property conversion receiving 5% rate.

Quote

 

Residential conversions

It’s a common scenario; a business owns a commercial property on the edge of a town centre, which has been empty for some time as the owner cannot find a commercial tenant in these difficult economic times.  The building is now used as offices, but it was originally used as a large house.  The owner intends to convert it back into residential use as three flats, which can be sold following conversion.  The building work would be subject to VAT at the 5% rate, but in order to reclaim any of the VAT incurred the property would have had to have had no residential use for at least ten years for the sale to be zero-rated, otherwise it would be an exempt supply and the VAT would be irrecoverable.

 

 

https://hlca.co.uk/resources/vat-and-construction-works-5-vat-reduced-rate/#:~:text=Specific considerations for Developers

This refers to the conditions under which a property developer receiving 5% might reclaim that 5%.

Quote

Specific considerations for Developers (recovery of 5% VAT)

 

Typically, any 5% rated VAT incurred in relation to a dwelling renovation, or conversion will be irrecoverable (for VAT registered developers) if there is an intention to sell or long let the property upon completion.

However, input VAT at 5% will be recoverable in the following scenarios:

• If the residential property was empty for 10 years prior to starting the works any onward sale will be Zero rated, and thus related input tax will be recoverable subject to the normal rules.
• If it is intended that the property will be used as a furnished holiday let upon completion, any future letting income will be taxable to the standard rate and therefore related input tax incurred on the renovation or conversion works will be recoverable subject to the normal rules.

 

[Bird]

My builder has taken advice from his accountant and is proceeding at the 5% VAT rate, without me needing to generate any sort of certificate.

[Bird]

And the heating system is zero-rated VAT, being classified as renewables. It is an air source heat pump with underfloor heating.

[lookseehear]

Copy/Paste from ChatGPT - no guarantee that it's correct, but I find this is the kind of thing it's pretty good at:
 

Here's a breakdown of your questions with answers based on VAT regulations and property tax rules in the UK. However, always consult a tax advisor or HMRC directly for confirmation specific to your circumstances.

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1. Does the 5% VAT rate apply to limited companies, not just individuals?

Yes, the 5% reduced VAT rate for eligible construction work applies to both individuals and businesses, including limited companies. The eligibility is based on the nature of the work and the property, not the entity undertaking it.

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2. If my limited company registers for VAT, can it avoid the VAT charge altogether?

• If your company is VAT-registered, you can claim back VAT paid on expenses related to your business activities, including construction costs.
• For qualifying conversion projects, the builder should charge 5% VAT on eligible works, and your company could then reclaim this 5% VAT as input tax if the property is used for taxable supplies (e.g., renting or holiday lets, which are considered taxable supplies).
• If the property is used for non-taxable purposes (e.g., private residential use), you may not be able to reclaim VAT.

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3. Are there restrictions on the sale of the property after claiming the reduced rate?

• The 5% reduced rate applies to the construction services, not to the property itself. Selling the property does not retroactively affect the reduced rate applied to the construction.
• If the property is sold as a new residential dwelling (within 3 years of completion), the sale may qualify as zero-rated for VAT purposes, which can be beneficial for VAT recovery.

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4. Are there restrictions on the use of the property after claiming the reduced rate, for example, short holiday lets?

• The 5% VAT rate on eligible works does not impose restrictions on the use of the property. However, the subsequent use of the property (e.g., for holiday lets, long-term rental, or personal use) will determine your VAT obligations.
• Holiday lets are treated as taxable supplies, allowing VAT recovery on associated expenses. Personal use or standard residential rental would not typically allow for VAT recovery.

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5. Since I'm just making up a certificate and handing it to the builder, how does HMRC know I'm not evading tax? Is the builder accountable once he's accepted my certificate?

• The Certificate: The reduced rate applies to certain types of conversions (e.g., converting non-residential to residential). HMRC requires you to provide the builder with a valid certificate to substantiate eligibility for the reduced rate.
• Builder Accountability: The builder is partially accountable. If HMRC later deems the reduced rate incorrectly applied, they could hold the builder responsible unless they can show they acted in good faith based on your certificate.
• Your Responsibility: As the issuer of the certificate, you are also responsible for ensuring the accuracy of your claim. HMRC could challenge the claim and impose penalties if the reduced rate was not genuinely applicable.

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Recommendations:

1. Drafting the Certificate: Follow the template provided in VAT Notice 708, Section 18.2, and ensure the property meets the eligibility criteria.
2. Professional Advice: Engage a VAT consultant or tax advisor to ensure compliance and clarify your eligibility for the 5% rate.
3. VAT Registration: Consider registering your company for VAT if the property will be used for taxable activities like holiday lets. This could improve your VAT recovery position.
4. Documentation: Maintain clear records of the property's usage and the justification for the reduced rate.

[Temp]

Beware if it's a build to rent. My understanding is that letting is exempt from VAT so you cannot reclaim input VAT. It's a little known issue I'll try and post a link in a few mins.

 

 

 

 

[Temp]

This link is talking about the consequences of renting out a new property (instead of selling it) on the VAT you pay or reclaim when building it.

 

I don't know if the HMRC Information sheet referred to below is still current. It probably doesn't apply if you intend all along to rent rather than sell.

 

There might be a way around it by selling the property to another company you set up to rent it out. The sale is zero rated rather than exempt and that can make a difference. 

 

Seek advice on this issue.

 

https://www.bishopfleming.co.uk/insights/vat-consequences-interim-rental-new-residential-property

 

Quote..

 

With the recent slowdown of the housing market, many developers are considering interim rental of new residential units, to generate revenue pending finding buyers.

 

In this article we explore the VAT consequences of this, and ways to mitigate the VAT cost.

 

Where a housing developer has constructed new houses or flats, or converted non-residential property into dwellings, and they are intended for sale, the VAT incurred on the development can be recovered in full (except some fit-out costs like appliances on which the VAT is blocked).

 

The VAT in question is often VAT on the land or property if incurred at purchase, and the legal and professional fees etc. This can amount to significant amounts of VAT.

 

For VAT purposes, interim rental represents a change of use of the property from the intended zero-rated sale, to exempt rental. Exempt use does not give a right to recovery of related input VAT. This could potentially result in clawback to HMRC of all the VAT recovered.

 

However, in the last slowdown in 2008 HMRC recognised this could produce an unfair outcome, and issued a VAT Information Sheet saying that where the developer retains an intention to sell the properties, there should be a fair and reasonable adjustment to reflect both the temporary exempt use and the intended sale.

 

This policy has been included in HMRC’s current internal guidance so should remain available to use. In most cases it should result in a smaller VAT clawback and can result in no adjustment if the amount is small enough to be below ‘De Minimis’ levels.

 

However, the amounts can be complex to calculate, depending on factors such as the length of the interim rental period and expected sales value, both of which may not be known or difficult to evidence.

Another option to consider is whether the new residential properties could be sold to a group company prior to the group company renting them out.

For VAT purposes this can fix the zero-rated first sale of the property by the developer, and secure the VAT recovery on its development costs, but needs to be considered alongside wider commercial, legal and tax implications including SDLT and Corporation Tax etc.

 

If you are considering interim rental of new residential property pending sale and would like to explore your options, please get in touch with our VAT team.

[andyscotland]

4 hours ago, lookseehear said:

Copy/Paste from ChatGPT - no guarantee that it's correct, but I find this is the kind of thing it's pretty good at:.

 

It actually did pretty well at that until it got to the certificates question, where it is completely wrong (but to be fair a high number of humans including accountants also get this wrong).

 

For new builds and conversions to "dwellings" no certificate is required nor should one be issued (VAT 708 Section 17 and the definitions in 14.2-14.5)

 

In those cases HMRC expect the builder to know what they are building/supplying and how that type of work should be rated for VAT - in much the same way they expect a shop to know whether they are selling biscuits or cakes. 

 

The certificates are for cases where the building would not normally be zero / reduced rated, but the customer is entitled to a lower rate because they are a charity or are building a care home / hospice / etc. In that case it's for the customer to prove to the supplier that they are eligible and the certificate is part of that.

 

[Bird]

Good shout on trying ChatGPT, lookseehere!

Thanks temp and andyscotland for your additional input.