New build office VAT/Tax sanity check

VAT on new build office office with mixed use via Limited Company

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I've got a client who works from home via a limited company business that makes 100% taxable supplies via normal VAT not FRS. He is looking to build a new large 'garage' in the garden which will have an office above which will be 100% business use for approx 5 years. The total build cost will be circa £150,000 plus VAT.

Initial thinking is that his company is invoiced and pays for the entire build (funded primarily via a directors loan account) and it recovers a 'reasonable proportion' of the VAT - say 70% of the build costs since although it would be 50:50 floor area split the complexity of the building and services being fitted are primarily for the office and wouldn't be required for a normal garage build.

The company then charges rent on the private storage value downstairs, say £2400 per annum (rough market rate) no VAT being payable.

After 5 years the property is then sold to the director and paid for via the loan account. As the property has been built for over 3 years and not opted to tax I believe there would be no VAT charge on the sale which obviously would need to be at market value. (due to location and not possible to split the garage away from the house on the deeds I would not expect significant capital value growth above build cost)

So overall he's had to pay out CT on the rental incoming to the company (and a little bit of IT to be able to draw out £2400 to pay back in of course) but he's been able to recover 70% of the VAT on the build......sanity checking myself.....have I missed something or does someone have a better idea of how to do it?

Have done a search of past posts but they primarily seem to be about recovering VAT on small garden offices.

Thanks

Replies (5)

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By Matrix
13th Aug 2018 18:24

You have missed the BIK and CGT implications. I also don't see how the company can sell back something which it doesn't own.

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Replying to Matrix:
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By GTC
13th Aug 2018 18:50

Hi Matrix, I don't quite see where you're coming from:

1) There should be no BIK as the client personally is paying a market rent for the use of downstairs to the company.

2) I did mention that there isn't an expectiation of much in the way of capital growth on the value of the property, I accept that sale needs to be done at market value so inherently CGT is a 'risk' but otherwise not significant.

3) The company is being invoiced for and paying for the build, why therefore are you saying it doesn't own the building?

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By ruth.julian
13th Aug 2018 21:31

I am assuming the company doesn't own the land either leasehold or freehold. On what basis does it own the building apart from paying for it to be built? If there is no option to tax, there is no entitlement to claim the input tax on building the garage/office as the rents will be exempt and the eventual sale will also be exempt for VAT purposes.

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Replying to ruth.julian:
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By GTC
13th Aug 2018 22:01

Per Solicitor legal ownership of the building doesn't need to include ownership of the land just agreement for it to be built on said land so I think the 'ownership of the property' is likely a red herring.

As the building is owned by a VAT registered business making 100% taxable supplies and occupied for its own commercial use isn't there the ability to recover VAT without the option to tax. I know the rent charged would mean not 100% taxable use so restriction on the reclaim but that is either dealt with by the 30% not claimed or alternatively could instead of charging rent could allow a BIK for the use of the space.

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chips_at_mattersey
By Les Howard
14th Aug 2018 11:44

Without an option to tax, there can only be partial input tax recovery in the company. But, if you try to opt to tax you will need to check the anti-avoidance legislation since the director has funded the construction.
And, from other comments, you will need to balance VAT against other taxes.

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