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VAT on Commercial Property altered to mixed use

VAT on Commercial Property altered to mixed use

I am trying to understand the VAT position on a property as follows. 

Property has been owned for some time.  Originally both floors of property were offices, property was opted to tax and VAT charged on rents etc.

One floor has now been converted to residential and let out as flats.

I understand from looking into this that the rent charged on the residential part is exempt from VAT and that therefore the input VAT on a proportional part of the expenditure in relation to the property should be non-recoverable, and that (in the absence of any specifics) the best way of apportioning the expenditure is on a rental income basis.

What I don't know is that if the property is opted to tax originally, whether the VAT incurred on the works to alter the property from commercial to residential can be recovered?  And also if we need to notify HMRC in any way that the income is now partially exempt from VAT.

One further question.  The electricity is invoiced to the Landlord and charged out to the tenant.  Should we a) claim the input VAT on the electricity and then invoice out to the tenant plus VAT on a proper VAT invoice, or b) not claim the VAT on the electricity and then invoice out the gross cost to the tenant.    The net effect is the same, I just wonder which is the correct treatment.

Any help would be very gratefully received - and if you can quote the relevant guidance that would be even better.  Thank you.

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21st May 2012 11:02

Option to Tax - Mixed Use Property

Where you have converted part of a commercial property to residential use, the existing option is disapplied for that portion of the property. There is no requirement to notify HMRC. You are also correct that the corresponding input tax is not deductible, under the Partial Exemption rules. But you could consider a floor space calculation, rather than an income-based calculation. Notice 706, chapter 6 tells you more; you would need to agree this with HMRC.

The guidance regarding electricity re-charged is in Notice 742, para 12.3. The question here is whether the electricity is provided within the lease (VAT-exempt to a residential tenant; input tax not deductible), or whether it is a separate supply to the tenant (5% to a residential tenant; input tax deductible).

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By fkaim85
25th Feb 2016 14:37

Hi there, does anyone know the answer to the following.

My client owns a mixed use-building, which is commercial on the ground floor and residential on the upper floors. My client is not currently VAT registered and there is no option to tax on the building. 

My client now wishes to register for VAT and opt to tax this building.

There is only one commercial lease (which is for £50,000 per quarter) covering the whole building, i.e. one lease covers both the ground floor commercial element and the upper residential elements. The lease's tenant is allowed to sub-let the upper residential units, as per the terms of the lease. My query is as follows:

At the moment my client is raising a single rent invoice of £50,000 per quarter to cover the whole building. If this building is opted for tax how would the VAT treatment work. Would my client raise a VAT invoice of £50,000 + 20% VAT to cover the whole building?

Many thanks,

Frixos

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