VAT on converted property having opted to tax

VAT on converted property having opted to tax

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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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Portia profile image
By Portia Nina Levin
29th Sep 2014 15:40

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.

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By spidersong
29th Sep 2014 15:48

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.

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By johnthegood
29th Sep 2014 15:53

what if I sell the flats piece by piece

Thank you spidersong.  Does that mean that if I sell the flats one by one over the next few years that only the first flat sold qualifies to be zero-rated, and therefore I can only claim back the VAT on the conversion costs for that one?

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By spidersong
29th Sep 2014 16:40

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.

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blue sheep
By NH
30th Sep 2014 07:58

agree with above

I agree with the above, also conversion work should be at 5% not 20%

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By The VAT Doctor
29th Sep 2014 22:44

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...

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By The VAT Doctor
29th Sep 2014 23:24

Lady HP
Re: HMRC refusing to repay 20% VAT, can see this is exactly what happened in the lady Henrietta Pearson case!

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Replying to G Webber CTA:
blue sheep
By NH
30th Sep 2014 11:18

didnt HMRC lose?

The VAT Doctor wrote:
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%?

 

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By johnthegood
30th Sep 2014 14:17

so can I claim

So if I self manage the conversion and suppliers charge me 20%, can I still reclaim it?

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