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VAT exemption waiver & conversion to residential

I recently took over book-keeping for a client who had previously partially converted a property to residential.  The owner previously opted to tax the property and it was let as a commerical premises for some time, so I understand.

I believe that the residential part of the property now should be rented out with the rent exempt from VAT, and the commercial part rented out with VAT added - and this is what has been happening.  Costs incurred are split upon area rented, or another rate if more appropriate (e.g. electricity is split on usage) - with the VAT not being reclaimed on the part relating to residential.

I'd like some comfort that this is correct!

Also, should there be some paperwork filled in for HMRC to unelect the residential part of the property for VAT?

Many thanks

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29th Jan 2013 09:10

Mostly there

There's no need to unelect any part of the property it's automatically disapplied where it's used as a dwelling.

In terms of the rest of it you have the right idea but possibly not the right application, basically you should split all the invoices into three 'piles', ones wholly related to the taxable let (reclaimable), ones wholly connected to the exempt let (likely not reclaimable), and overheads (residual). The VAT on the residual invoices are then split according to the ratio of taxable and exempt income that the business has with the taxable part recovered and the exempt part added to the exempt 'pile'. If the exempt 'pile' is under £625 per month (£7500 p.a.) on average and less than 50% of the VAT incurred then you can recover it, if not you lose all of the VAT relating to the exempt let.

Strictly speaking to use any other method you need to discuss a partial exemption speical method with HMRC. So they may argue with the way you've split some of the invoices, and it may be best to write and get confirmation of the method you're using before continuing.

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29th Jan 2013 19:45

Spot on

Great advice - treat Partial Exemption with care as there  are savings to be made as well as costly mistakes.

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07th Feb 2013 22:17

Thank you

A nice succinct answer that I fully understand.  Thank you so much.

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