Basic position is that a vat registered company which has a normal trade as consultants, has bought some derelict properties on a site
Properties have been disused for several decades but were residential prior to falling into a state of disrepair
Company has bought them and is incurring costs to make them habitable - once renovation is complete the company will rent them out as individual properties to private individuals
Can the company reclaim any input tax on the renovation cost or is it disallowed as the eventual supply of renteed property will be vat exempt?
Thanks in advance
Replies (12)
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Unless the input VAT is de minimis (which I assume is unlikely) then, not, it will not be recoverable.
Why not sell, or grant a long lease over, them to a subsidiary company as a zero-rated supply, recover the input VAT and the the subsidiary can then do the exempt renting? This is the standard planning that HMRC do not object to.
Yes. Zero-rated. The supply of the first major interest by a person converting a non-residential building into a building designed as a dwelling or a number of dwellings is zero-rated.
And a building designed as a dwelling that has not been used as a dwelling in the last 10 years is a non-residential builing. VATA 1994, Sch 8, Grp 5, Item 1(b) and note 7A.
D'oh. For 'several decades' I read 'several years'.
Agree entirely on the planning point.
There is likely some tax planning you clients may be able to benefit from using a contractor company (which may be your client wearing a different hat) and possible reduced rate supplies. I would chat with a vat consultant BEFORE embarking on anything.
It seems unlikely that you'll be able to get zero rating but it's more than possible, as DJKL implies, that a contractor will be able to charge his work - including materials - at 5%.
Agreed the contractor will need to charge 5%, as it's a change in number of dwellings conversion, but if you structure a zero-rated supply at the end of it, you can recover all the VAT anyway.
The current suggestion creates a partial exemption position in relation to recovering VAT on the company's general overheads.
I agree. Zero rating is difficult since the properties were previously residential. (Ask your VAT Consultant whether the 10 year rule will prevent or allow zero rating.)
But do go for 5% on renovations, to minimise the irrecoverable VAT.
Does the 5% not also depend on them not having been occupied in the last 2 years Les. The contractor zero-rating there supply is not just difficult; it's not a legal possibility.
But the OP says (I’ve checked!) that the properties have lain empty for “decades”. That suggests no problem with the 10-year rule.