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VAT, conversion of building and charities

Not sure where to begin on this one

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I appreciate that VAT can be ridiculously complicated but I'm hoping that my client's scenario isn't one of those. Being more of a VAT numpty than a VAT expert, however, means that I'm really not sure where to begin in terms of advising him.

So, my client has a half share in a company which ran a boutique hotel which has failed. He provided the money and the other shareholder the hotel expertise. She has now withdrawn from day-to-day contact and essentially left my client holding the baby. That's the background and there are obviously lots of implications to that but let's leave those alone and not muddy the waters (unless there is somehow a VAT implication). Just in starting to frame this query, though, it occcurs to me that I don't even know for sure whether the company is VAT registered but I would assume that it must be.

Now to the "plan": my client has provisionally reached an agreement with a charity to convert a wing of the building into sheltered accommodation but, again, I don't know if that is a respite care situation or longer-term accommodation or whether there is a VAT implication there either.

My initial thoughts (but as the above self-professed numpty) is that none of this qualifies for special VAT treatments (unless sheltered accommodation qualifies as being a dwelling), so no VAT reclaim to make and the eventual supply to the chaity would be exempt too. My client, however, is firmly of the belief that the conversion will qualify for reduced rate VAT which he thinks he will be able to reclaim (I don't think he's thought as far as the onward grant of an interest yet).

So, is my client right and is there a possibility of reduced rate VAT which could be reclaimed? And if so, what does that mean for the onward lease to the charity: does that then fall into VAT?

I would be very grateful for any and all answers. I'm not expecting chapter and verse, just any sort of steer would be very much appreciated.

Replies (3)

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chips_at_mattersey
By Les Howard
07th Apr 2021 19:56

Two options to explore, but fuller professional advice essential.
1. The reduced rate will apply for conversion from commercial to residential. You will need to provide something to the contractor I suspect.
2. Disposal of a converted property may be zero rated.
Several conditions to check, of course.

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Jason Croke
By Jason Croke
08th Apr 2021 07:26

I agree with Les and you are not far off yourself.

Conversion of a hotel (commercial) into residential would be reduced rated supply by the contractor. Section 7 of https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708#se...

Same notice, jump to 2.1.2 and then 17.1 as the purpose/design of the conversion matters (relevant residential purpose definition at 14.6.1), but mainly an issue for contractor.

In theory, the supply from contractor to hotel would be 5%. The right to reclaim that VAT by the hotel depends on what VAT status their supply is to the charity, if it is a short lease, that would be exempt and no VAT recovery (as per your view), if a longer lease then it could be zero rated and VAT recovery permitted.

As Les has posted, lots to go wrong here, risk varies depending upon the project cost, a £200k project cost at 5% is £10k VAT but a £1m project will be £50k VAT risk. On the topic of project value, if it costs more than £250k and the client reclaims the VAT, then it'll be a Capital Goods Scheme item which may see input tax repaid to HMRC over a 10 year period if there is any exempt supply made of the site.

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By adam.arca
08th Apr 2021 09:39

Wow, thank you both for that really helpful info.

And, Jason, that really was above and beyond. That's going to help me frame an initial response to the client (meeting today) and see where things go from there: hopefully away from me and towards someone who knows what he's talking about!

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