A property that was commercial use was purchased. I was advised at the time to opt to tax and have been charging the business occupier VAT on the rent.
I have now started converting the building into 11 residential flats and am claiming back any VAT on the work.
My question is what happens VAT wise when I sell the flats?
Replies (9)
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Well
The first grant of a major interest in a dwelling by a person that has converted a non-residential building into a number of dwellings (including the dwelling in question) is, of course, a taxable supply, irrespective of whether or not you have opted to tax. I am sure that you know the relevant rate of VAT.
I always suggest people toddle off and see their accountant in this sort of situation.
Not a lot...
The first grant of a major interest (freehold or 21 year+ leasehold) in a converted residential property is zero rated. So if you're selling the flats then it's zero VAT but you have the right to recover the VAT you incur.
So if you're recovering the VAT as you go you have to make sure that you do grant a major interest, so don't do rents under 21 years otherwise there will potentially be adjustments needed to the VAT you've recovered depending on how long you're using for rental purposes, and whether you retain an intention to dispose of the freehold etc.
Basically the option disapplies to any residential use so, even if you do rent, the rent is going to be VAT exempt and if in the future you converted back to commercial after a period of residential use then the option would still be in place, unless it gets to 20 years after you opted and you ask for it to be revoked.
Not just the first...
It's applies to each part of the building if it's a part capable of occupation independently from the rest. So if you're doing the project piecemeal so you complete one flat and then sell it then convert the next then each sale will be zero rated and you should be able to get VAT back on all the conversion work.
However as Nina points out with property it really is worth tying down all the VAT elements before you start doing things like claiming the VAT back. Especially since a forum answer wont have looked at plans or be able to get into depth about things like shared areas of developments and what you'll do about service charges etc. etc. Given the value involved in property development it is well worth procuring professional advice.
development costs
Nothing to add on the main issue, but wanted to mention the conversion works are probably subject to the 5% rate. You can recover this, but may be best for cashflow. HMRC could I suppose refuse to refund 20% VAT if the work was actually at 5% rate, leaving it up to you and the builder to sort out.
Also, would remiss in not saying (to Nina)
"Oh Miss Jones".
Sorry, Rupert Rigsby moment came upon me...
Lady HP
Re: HMRC refusing to repay 20% VAT, can see this is exactly what happened in the lady Henrietta Pearson case!
didnt HMRC lose?
Re: HMRC refusing to repay 20% VAT, can see this is exactly what happened in the lady Henrietta Pearson case!
I thought HMRC lost this one and had to refund the full 20%?