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Is VAT payable on holiday home on deregistration?

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Farming partnership converted a barn into a holiday home and reclaimed the VAT because the expenses were incurred to generate a taxable supply (the income from the holiday let).

The turnover is less than £85,000. The partners want to dereigster from VAT. VAT Notice 700/11 requires VAT to be declared on goods on hand at deregistration: tractors, farm machinery, holiday let furniture etc. But what about the holiday let itself? The inputs converting the barn into a holiday let were standard rated services. There is no requirement to pay VAT on services on deregistration. But I'm concerned about VAT Notice 708 'Buildings and construction' section 5.4.2: 

'If, after conversion, the building is less than 3 years old when the sale or long lease is made, the sale or long lease is standard-rated. If the building is 3 years old or more, the sale or long lease is exempt.'

The conversion is less than 3 years old. If they were to sell they would have to charge VAT. Therefore I would have expected VAT to be paid on deregistration. I've spoken to the VAT Helpline and they say no VAT is payable. Is that correct?

Replies (12)

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Hallerud at Easter
By DJKL
20th Feb 2020 15:17

https://www.gov.uk/guidance/capital-goods-scheme-notice-7062#scope-of-th...

Capital Goods Scheme might be my starting position re researching the position.

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Replying to DJKL:
Morph
By kevinringer
24th Feb 2020 13:37

Thanks DJKL. The partnership has owned the building for decades. When it was bought the cost of the building would have been about £10,000. The cost of the conversion is about £100,000 plus vat. My understanding is the CGS does not apply.

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Psycho
By Wilson Philips
20th Feb 2020 15:41

If the VAT Helpline have told you that no VAT is payable it is usually safe to assume that VAT is in fact payable.

Although, curiously, they are probably correct here. Firstly, does the property meet the definition of ‘holiday home’ for the purposes of 5.4? Secondly, in any event, I think you have misunderstood the 3-year rule - it doesn’t refer to the period following conversion, but to the age of the building itself. A building that was constructed in 1960 and converted last year is 60 years old.

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Replying to Wilson Philips:
Morph
By kevinringer
24th Feb 2020 13:39

Thanks Wilson, I had read it as the period following conversion and not the age of the building itself. Thanks for putting me right.

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By The Dullard
20th Feb 2020 15:53

What Wilson just said. I think the words at the beginning of 5.4.2 should be "if, after ANY conversion...", rather than just "if, after conversion...". The point is that a dwelling satisfying the definition of 'holiday home' is a commercial building and so not exempt until it's no longer new (@ 3+ years' old).

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By djbrown
24th Feb 2020 14:57

I hate to disagree, but a holiday home is still a dwelling, not a commercial building. Schedule 8 Group 5 of the VAT Act stipulates VAT is payable on the sale of such a building, but only when new and only where there is a specific occupancy restriction. The main point is that it is not 'new'.

Apart from anything else, Notice 700/11 cover this point, in telling us what you can exclude, when considering VAT, at de-registration:

7.3 What you can exclude
You do not have to account for VAT on any items on which you did not claim VAT when you bought them. Examples include:

land or buildings which you obtained free of VAT, even if you’re using them to make standard-rated supplies (such as holiday accommodation or because you’ve opted to tax the property)

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Replying to djbrown:
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By The Dullard
24th Feb 2020 15:18

I was simplifying, but the combined effect of note 13 to Sch 8, Grp 5 (which prevents zero-rating of new holiday accommodation) and note 12 to Sch 9, Grp 1 (which reinvokes exemption for holiday accommodation that is not new) is to put new holiday accommodation on the same footing as a new commercial building.

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Replying to The Dullard:
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By djbrown
24th Feb 2020 16:04

There's just too many negatives and double negatives in the legislation, for it to make immediate sense. The exception to exemption (e) to Sch 9 makes a supply of holiday accommodation standard rated (20% VAT). Note 12 reads " Paragraph (e) does not include a grant in respect of a building or part which is not a new building of–
(a) the fee simple..."

I think that is confirming that a converted building is not regarded as "new". (Or at least that's what I think it says...)

I've certainly successfully argued that the sale of a barn conversion is exempt, not standard rated, within the 3 years following conversion on a couple of occasions.

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Replying to djbrown:
Morph
By kevinringer
24th Feb 2020 16:19

Thanks djbrown, that's conclusive.

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Replying to djbrown:
Psycho
By Wilson Philips
24th Feb 2020 16:28

I don't read that as confirming that a converted building is not a new building.

A building is either new or it isn't regardless of any intervening conversion - Note 12 simply dictates the respective treatment.

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Replying to djbrown:
Morph
By kevinringer
24th Feb 2020 15:20

Thanks djbrown. That last quote from 7.3 confirming that you don't include buildings on which you've opted to tax contradicts 7.2 which states:

'You must include assets such as:

interests in land (but only if they would be taxable if you sold them, for example, where an option to tax has been made)'

Fortunately my client has not opted to tax but the apparent contradiction caused me to be doubtful about the remainder of 7.3.

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Morph
By kevinringer
24th Feb 2020 16:20

Thanks everyone. I appreciate your help.

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