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VAT Option to tax Commercial Property

A client opted to tax a commercial property for VAT a few years back. VAT was reclaimed on some major works on it.

He is now wishing to convert the whole property into flats for residential use, to which VAT does not apply. What happens to the earlier option to tax and will he need to repay any VAT?


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..think the option is disapplied so that normally the VAT would be repaid...however as long as there is an onward zero rated sale of the flats recovery would be preserved ...if they were to rent them out or if the sales were exempt then you have a problem....

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...... for the reply. There would be no onward sale of the flats as they would stay in the ownership of the client, having obtained change of use permission.

It makes sense that the option to tax would be disapplied but I have not been able to find anything definitive on that. For instance, how would the VAT to be repaid be calculated?

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The option would not be disapplied

What you have is a change of use - from, I assume, taxable supplies in the form of commercial rents on an opted property to exempt rents of residential property. The treatment will therefore depend on the level of expenditure on the purchase of the property and subsequent works (the previous works, not the proposed conversion). If the level of such expenditure brings the property into the Capital Goods Scheme, then there will be a clawback of input VAT over the remaining CGS intervals. If not, you have little to worry about.

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That is very helpful....
.....I can tell you that the property is already owned by the client (and subject to an option to tax) and the offices (which were recently renovated at a cost of around £70,000 and the VAT reclaimed) are now subject to an application to the local authority for change of use to residential. The "conversion" will be at minimal cost and the ownership will not change.

Can you say definitively what the VAT position will be?


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Hi Johnday

i would suggest that several of the readers could say definitively what the position would be but would refrain from doing so with engagemnent letetrs in place.

I would suggest you ask a VAT specialist to give you a written reply on the matter as it will ensure your PI is safe and for the sake of probably not a lot of money you and your client will have peace of mind.

by the way I am not a VAT specialist and not touting for business!!

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Definitive advice

As the previous respondent says, this forum is for discussion of opinion and general advice. Even if there were sufficient information I would be wary about offering 'concrete' advice to a non-client.

But the fact is that there is insufficient information - we don't have the purchase date of the property, we don't know how much it cost etc etc. You should engage with a VAT consultant, provide all the relevant facts, and take it from there.

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