Ken Howard
Share this content

VAT on Holiday Lettings Sale

VAT on Holiday Lettings Sale

My head hurts as I have been reading up on the VAT land & property guide. The situation is that a derelict barn is being converted into several holiday cottages. The planning permission restricts their use so that they cannot be used as permanent dwellings. It seems that the planning restriction makes them standard rated, which is good that input VAT can be reclaimed on the conversion costs, but very bad in that the selling price is deemed to be VAT inclusive, so 7/47ths of the sales value of each is lost to the VAT man. Is this really the right understanding of the position? Is there any way to avoid charging VAT on the sale, even if that means losing the input VAT recovery on the costs. If VAT is due on sale proceeds, it turns the whole project into a loss before it is even started. Help?
Ken Howard


Please login or register to join the discussion.

31st Mar 2008 16:59

Thank you so much
Thanks for your excellent response. It has helped put my mind at ease that I understood the position correctly in the first place and has also given me food for thought about ways to mitigate this potential disaster, I particular like the idea of renting the properties out in the first instance and then selling later. This was definitely not the initial plan but does seem an escape route to avoid a nasty loss. Due to their size, selling them to VAT registered businesses is unlikely - most likely that they will sell to amateur investors. But there is scope I think to see if they can be sold as a group, possibly at a discount, to someone/organisation who would already be vat registered or who would become vat registered, and like you say, then VAT isn't an issue anymore. I will also bear in mind the capital goods scheme - I did know about it but hadn't given it any thought in this scenario - I do indeed need to read up on it as well. Once again, many thanks for you very valuable contribution.

Thanks (0)
By Anonymous
31st Mar 2008 16:32

Complex Situation
The planning consent restrictions means the properties cannot be sold at the zero rate as they are not 'dwellings' in the technical sense. This means they must be sold at the standard rate (17.5%) of VAT - this is correct.

Upon sale of a property, the price you agree with a buyer will either have to have VAT added on top of the agreed selling price or be deemed to be VAT inclusive - so your understanding of this is correct.

A post style forum could never do your query enough justice as there are many questions to ask, but off the top of my head :-

1. If you are selling property to another VAT registered business, then VAT will not be a problem, the buyer will likely be continuing the letting of the property, holiday rentals are taxable so will treat as their input tax.

2. If selling to an individual/non-registered business then you'll need to negotiate the sale on a VAT inclusive figure and increase your selling price to account for the VAT. You must charge VAT on the sale.

3. If to another business, it may fall under the Transfer of a Going Concern route whereby the buyer intends to carry out the same business - so you may need to line up one or two future lets to show there is a business there and then transfer to buyer - deal will be outside the scope of VAT.

4. Capital Goods Scheme. If the conversion works cost more than £250,000 then they'd come under the capital goods scheme meaning any future sale/change of use may require an element of input tax to be reclaimed anyway. For instance, if you somehow make the sale exempt and you spent £500k on conversion then you'd have to pay a % of input VAT back to HMRC.

5. On the back of that, if the holiday let is seen as a commercial property, a commercial property over 3 years old (from completion) will be an exempt sale thereafter so you may need to retain the properties until they go over 3 years old and then can be sold at exempt rate - but then refer back to Item 4 if conversion costs were over £250k as some input tax may need to be repaid.

Hope that gives you some more things to think about and read up on. Go to HMRC website, check out Notice 706-2 (Capital Goods Scheme), Notice 708 (Property & Construction), Notice 742 (Land & Property) and Notice 700-9 (Transfer of a Going Concern).

Thanks (0)