Hi Paul
I’m not surprised you’re confused – the subject is difficult. As you’re probably aware, the normal rate of VAT is 20% but residential conversion work can be at 5% as a “quailifying conversion” if certain conditions are met.
The rules are explained in detail in HMRC’s VAT Notice 708: Buildings and construction http://tinyurl.com/9e6e9wh.
Section 7 of the notice deals with conversions for residential use.
If there is an existing “single household dwelling”(“SHD”) in the property, then the conversion of the whole property into one single dwelling wouldn’t qualify for the reduced rate because you’re not changing the number of SHDs in the property. So you have to be certain that the work changes the number of SHDs in the property to qualify for the relief.
Section 7 includes the statement that the qualifying conversions would typically include conversions where “living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained..”.
You say that there is currently “no separate flat” in the property as the existing accommodation isn’t separate from the rest of the property. But you have to be certain that the existing accommodation doesn’t consitute an SHD as defined in the VAT legislation. The term is defined in the law and for this purpose the definition is as follows:
- is designed for occupation by a single household either as a result of having been originally constructed for that purpose (and has not been subsequently adapted for occupation of any other kind), or as a result of adaptation;
- consists of self-contained living accommodation;
- has no provision for direct internal access to any other dwelling or part of a dwelling;
- is not prohibited from separate use by the terms of any covenant, statutory planning consent or similar provision; and
- is not prohibited from separate disposal by the terms of any covenant, statutory planning consent or similar provision.
This is a legal definition (see paragraph 14.4 of notice 708) and if the existing accommodation fulfills ALL of these conditions, then it would be regarded as an SHD. In that case, the reduced rate wouldn’t apply to the conversion work because you wouldn’t be changing the number of SHDs even though you’re converting the whole of property, most of whch was previously used for business purposes.
Based on your description of the existing premises, it doesn’t sound as though there is any existing dwelling, therefore the conversion of the pub to a dwelling should qualify for the reduced rate, as explained in Section 7 in the Notice.
If you are in any doubt about whether the existing accommodations could be defined as a dwelling, then you might want to check with the local planning office or council tax office to see how the property has been previously used or designated for planning or council tax purposes.
You also have to remember that the VAT liability of the conversion is ultimately the responsibility of the building contractors, as they have to pay the VAT which they charge for their services and related goods to HMRC. So I’d recommend discussing the VAT liability when you’re engaging contractor(s) to carry out the work. Builders are often cautious when dealing with such issues in case HMRC disagree that the reduced rate applies.
If there is an existing SHD in the property which hasn’t been occupied for 2 years or longer, then the conversion work may be regarded as refurbishment and qualify for relief under teh rules in Section 8 of Notice 708. You might want to check out my article on domestic property conversions http://tinyurl.com/9j3dl2z which explains the subject in a bit more detail.
I hope this helps but please remember that information provided here on the forums doesn’t constitute formal advice and is for general guidance only. VAT and property is a complex subject and people doing domestic conversions often get caught out because they don’t have much if any experience in the subject especially if they don’t run their own business and aren’t registered for VAT. The information here only deals with the specific issue of VAT on the conversion work, but you didn’t say what you’re planning to do with the property once the conversion work is completed and it is possible that you may be entitled to recover the VAT paid, depending on what you do with the converted proeprty.
Either way, if you’re in any doubt, or if, for example, the amounts involved in the conversion are significant, it may be worthwhile obtaining formal advice and I’d be pleased to help if required.
Marie
