Can VAT be recovered on a residential conversion?

Intended supply and the recovery of VAT in construction

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The business manages leased properties which has a mixture of taxable supplies (commercial rent and residential rent – AST’s).  Input tax for the exempt supply is blocked and is not recovered in the VAT returns.

If the business decides to convert a commercial building into flats that attracts a reduced rate of VAT at 5%, can the VAT amount be recovered or is this blocked because of the indented supply i.e. residential flats? Also, can the VAT on professional fees (architects, project manager fees etc) relating to the residential conversion be recovered or are they also blocked?

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paddle steamer
By DJKL
26th May 2021 17:16

Can they do a design and build contract via a wholly controlled buildco they set up, to reduce the prof team fees to the 5% rate?

I am struggling to see how the 5% can be recovered , maybe someone better informed will come along and advise re this point.

Thanks (1)
VAT
By Jason Croke
26th May 2021 17:23

The right to reclaim VAT - in any business- is always on the basis the VAT you are reclaiming is being used in making taxable (VATable) supplies.

If you convert/keep the property and rent, then you are making exempt supplies of rent and you cannot reclaim the input tax relating to that conversion project, including the architect fees/PM fees, etc.

If you convert/sell the property, then you are making zero rated sales of new dwellings, zero rate is a rate of VAT (unlike exempt), and you can reclaim all your input tax.

If the business already has a mixture of taxable sales (commercial) and exempt (residential), then it is already a partially exempt business and should be carrying out a partial exemption calculation and the conversion costs would go into that calculation, but probably not going to be de minimis.

Thanks (2)