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  • VAT & Property: A Brief Overview

    31 May 2022

    Keith Miller

    We are regularly asked to advise on property-related matters, both commercial and residential.

    It is interesting to note that we often hear the opinion that although there are lots of VAT issues and opportunities to consider in relation to commercial land and buildings, there isn’t that much going on when it comes to residential property, largely on the basis that apart from new build projects, everything’s VAT exempt.

    Although it may be true that most income generated from residential property is VAT exempt, it isn’t true to assume that there isn’t much to discuss in relation to residential properties.

    Read on to discover some common issues and opportunities that crop up in relation to land and buildings, including many that relate to residential properties.

    …freehold sale or long lease of a building that has been converted from non-residential to residential is subject to zero-rate VAT.

    Is property-related income VAT exempt?

    The ‘default’ position is that the grant of a right to occupy land or buildings (sale or lease) is VAT exempt. However, there are numerous exceptions. For example, the grant of the freehold or a lease over 25 years (20 in Scotland) in a new residential building is subject to VAT at the zero-rate. This means that although no VAT is payable on the grant, it is taxable nonetheless is taxable, so related VAT costs can be recovered.

    The freehold sale of a ‘new’ non-residential building is subject to standard rate VAT. ‘New’ means that it was completed no more than 3 years before the freehold interest is granted. The sale or lease of non-residential land or buildings may also be subject to VAT at the standard-rate if the person making the supply has opted to tax the land. They would typically do this to enable recovery of VAT on related costs (that would otherwise be irrecoverable if the supply was VAT exempt).

    Please note that the option to tax can be a complex area so care should be taken when considering whether an option to tax should be made. An option to tax may also be ‘disapplied’ in certain circumstances, so care needs to be taken.

    The provision of parking facilities is also subject to standard-rate VAT (including the lease of land to be used for parking) as is the provision of storage facilities, and the provision of hotel and holiday accommodation.

    Can I recover VAT incurred in relation to land related properties?
    The VAT recovery rules relating to land and buildings are no different in principle than normal VAT recovery rules, in that VAT can normally be recovered to the extent that the costs on which VAT is incurred relate to taxable supplies (made or intended).

    This is why it is important to understand whether a property or property transaction/ project will generate VAT exempt or taxable (zero or standard rate) income, or both.

    Although the usual VAT principles need to be followed, there is also a VAT scheme called the VAT Capital Goods Scheme that applies to certain types of property related capital expenditure where the VAT-bearing capital costs exceed £250k (e.g. acquisition, extension refurbishment costs). Although normal VAT rules apply to the initial recovery of any such VAT, the use of the asset has to be monitored over a 10-year period and adjustments to the initial VAT recovery may be required if the extent to which the land or buildings are used for taxable purposes changes over time.

    There are also ‘VAT clawback/payback’ rules that apply where VAT is recovered (or not recovered) on the basis of a particular intention, but that intention is never fulfilled, and the ‘new’ intention has a different VAT recovery profile to the original intention.

    Are there VAT Reliefs that can reduce VAT costs?
    Because many properties/property projects generate VAT exempt income, particularly residential projects, this will mean that VAT incurred on costs will typically be irrecoverable (either wholly or at least to some extent) and establishing the extent to which VAT costs can be recovered can be complex.

    This is why it’s important to be aware of VAT reliefs that may reduce (or eliminate in some cases) VAT on costs.

    The following are examples of services that are subject to 5% VAT rather than 20% VAT, and apply solely to residential properties:

    • Construction costs relating to the conversion of a non-residential building to residential
    • Construction costs relating to the conversion of an existing residential building resulting in a change in the number of dwellings
    • Refurbishment/renovation of an existing residential building that has not been occupied for 2 years

    It should also be noted that the freehold sale or long lease of a building that has been converted from non-residential to residential is subject to zero-rate VAT (so related VAT costs can be recovered in full, except VAT on ‘blocked goods’ such as kitchen appliances, curtains, etc).

    The sale of a residential building that has been renovated having not been used for residential purposes for over 10 years is also subject to the VAT zero-rate (treated the same as a conversion from non-residential to residential).

    The rules and conditions governing the application of these VAT reliefs can be complex and are often under-utilised by developers. This is often because contractors are unfamiliar with how VAT reliefs apply.

    Even where VAT reliefs and other VAT efficient structures are available, they will only typically apply if certain conditions are met, so it is essential that these conditions are identified and adhered to if a VAT relief is to be applied.

    VAT reliefs can be applied retrospectively too, so if a contractor has charged you too much VAT on past projects, it may still be possible to rectify this and obtain a VAT refund provided the VAT was charged within the last 4 years.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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