We have a client who has an opted, commercial property that is currently rented out. Its purchase price was over £250,000 approx 7 years ago.
They are looking to change the use to residential and sell the finished properties.
I am happy the new sale will be zero rated (first grant of a major interest) but will there need to be an adjustment under the capital goods scheme?
My concern will be the disposal test may apply as the output VAT on the sale will be nil, while the VAT recovered was significant.
Any help would be greatly appreciated.
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Zero rated OK
Zero rated turnover (as in sale of new residential properties **) qualifies for input tax recovery so no problem - still put to a taxable use (albeit @ 0% output tax as opposed to 20% output tax).
On the other hand potential issues arise with deciding to rent out the properties once converted into residential (from commercial) as residential letting is VAT exempt.
** See VAT guidance on this precise definition - I've shortened the phraseology used to make this answer more readable.