THE PROPERTY COLUMN
Reducing VAT on your refurbishment and conversion costs
This is an article for those property business people who have the misfortune to be VAT-exempt: those who do up and let, or sell, old residential property.
VAT is an odd tax. It’s bad to be exempt from it, because it means that all of the VAT you incur on your expenses is dead money. It can’t be reclaimed from HM Revenue & Customs, unlike VAT incurred by taxable businesses.
Perhaps the most common example of an exempt business is the sale and letting of houses and flats, which are always exempt from tax, except in the case of a new-build, or in the case of an old non-residential building that you’ve converted into a residential building.
While the property slump has no doubt reduced the amount of such activity significantly, there are still a fair few warehouses, barns, oast houses and even office buildings being turned into nice bijou houses and flats up and down the country, and the benefit of this is that you are, effectively, equivalent to a new-build housebuilder, in that you can zero-rate your sale of the finished units rather than exempting the sale. The significance of this, of course, is that if you zero-rate your sales you are notionally taxable, even though the rate of tax you charge is 0%. Someone must have had a lot of fun working that out!
Aside from those converting non-residential buildings into residential, there is another planning wrinkle that you might consider, if you’re converting residential to residential.
Elsewhere in this month’s TSR, the article on tax rate shopping talks about this. It’s known as the ‘changed number of dwellings conversion’ regime.
As the name, not particularly elegantly phrased, implies, the VAT relief we are talking about is available where your refurbishment and conversion of the property results in a different number of dwelling units from what there was before. This includes, incidentally, cases where there were no residential units before, although there do have to be residential units afterwards.
Where you qualify for this, the services of a building contractor to you are (or should be) at the lower rate of VAT, which is 5%. This is clearly going to be even more advantageous when the standard rate of VAT goes up to 20% in January.
We say “should be” because this is very often overlooked in practice, and it can be quite difficult persuading the builder to put his VAT rate down to 5% for you. After all, he’s the one in the frame if there is any mistake and the refurbishment didn’t qualify.
So it pays to know what you are talking about, and to be able to throw the book at the guy if you need to. Just consider the effect of your conversion costing 15% less!