Client is unable to recover VAT on his self build property because there are planing restrictions as to separate use and disposal of the new property.
This house is now not a dwelling for VAT purposes.
But, can client recover the vat on the costs of construction through his VAT return? If so how do we apportion it?
Client has built the house on his caravan site which he owns and operates as a sole trader.
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I don't like your question!
I assume we're talking about a non-dwelling that he built for the purpose of living in?
Whilst it might be a business asset, it seems to me that the input VAT hasn't been incurred for the purposes of making taxable supplies. Does seem bloody unfair though. I could be wrong, of course.
Any part of the building used for the business, eg an office would qualify and costs should be apportioned on a reasonable basis.
Could he let it as holiday accommodation and go and live in one of the caravans during holiday season? :)
Who will live in the dwelling?
I guess that this project / VAT recovery fails to be eligible under the DIY housebuild scheme because the occupant of the completed dwelling must be a worker on the site - as opposed to someone who was not a worker on the site. A bizarre and unfair rule, but there you have it, the fairness of HMRC well-demonstrated.
Therefore the property, by HMRC's definition, is a business related property and quite correctly you are therefore looking at recovery through the business VAT returns.
If the property is occupied by an employee of the business then I see VAT recovery being wholly justified (although HMRC like to say directors must be treated like proprietors in this matter!). On the other hand occupation by the proprietor will result in HMRC contradicting themselves and saying "that's a private residence, not a business property so you can't recover the VAT", the fairness of HMRC well-demonstrated.
This scenario sometimes happens with farmers where, from memory, the rule of thumb is that no more than one-third of VAT incurred is allowed to be treated as business recoverable in respect of the farmhouse - so VAT recovery of no more than one-third of total VAT incurred. In reality an anlysis of the use of the property (how many rooms used for what purpose) would be required to ascertain business related use. Don't overlook things like: laundry room used for site benefit, office, garage used for business commercial vehicle, storage space for site. Not a farm so the one-third rule don't apply might be more than one-third business use.
I can see only one positive thing about this: recovery of VAT on professional fees such as architects - nil recoverable under DIY housebuild scheme but some now recoverable as a business-related private residence. Same goes for tools acquired for the build project (if any). [ in practice the tools used would be used for site maintenance anyway and full VAT recovered for that reason via the main VAT returns ].
Probably too late to act on now, but if one entity built the private residence then sold it to different entity the sale would be zero rated and input tax would be recoverable by the builder. No VAT loss as a result.
Zero rating on buildings for commercial use...
Zero rating on construction of new buildings for commercial use IS available for some commercial construction that includes residential accomodation. I particularly think of a care home / nursing home in this context (for which the planning permission is for a care home not for a series of private residences), nevertheless zero rating is available.
I would hope and expect that the same principle to apply to circumstances like this.
As HMRC recognises in at least one of its publications that the intention of parliament was / is that new residential construction should be VAT-free.
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