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Vat on residential property development

Client company is renovating 4 properties which have lain derelict for decades

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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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Psycho
By Wilson Philips
30th Oct 2019 15:24

Unless the input VAT is de minimis (which I assume is unlikely) then, not, it will not be recoverable.

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By The Dullard
30th Oct 2019 15:31

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.

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Replying to The Dullard:
Psycho
By Wilson Philips
30th Oct 2019 15:33

Zero-rated?

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Replying to Wilson Philips:
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By The Dullard
30th Oct 2019 16:01

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.

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Replying to The Dullard:
Psycho
By Wilson Philips
30th Oct 2019 16:16

D'oh. For 'several decades' I read 'several years'.

Agree entirely on the planning point.

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Replying to The Dullard:
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By Adam12345
30th Oct 2019 15:35

Standard planning for new builds.

The sale of the properties will also be exempt.

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Hallerud at Easter
By DJKL
30th Oct 2019 15:31

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.

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Replying to DJKL:
RLI
By lionofludesch
30th Oct 2019 15:41

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%.

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Replying to lionofludesch:
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By The Dullard
30th Oct 2019 16:08

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.

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Replying to lionofludesch:
chips_at_mattersey
By Les Howard
30th Oct 2019 17:04

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.

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Replying to leshoward:
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By The Dullard
30th Oct 2019 17:41

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.

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Replying to leshoward:
Psycho
By Wilson Philips
30th Oct 2019 18:11

But the OP says (I’ve checked!) that the properties have lain empty for “decades”. That suggests no problem with the 10-year rule.

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