Hi Rachel
As you’re doubtless aware VAT and property can be very complicated and even scenarios that seem quite straightforward can lead to mistakes because the rules are very precise.
There are 2 main issues here: the VAT liability of the conversion work and whether you can claim the VAT back.
If you’re carrying out a conversion as explained in HMRC VAT Notice 708: Property and Construction s7 http://tinyurl.com/9e6e9wh, then the services and related goods qualify for the reduced VAT rate of 5%.
You can only claim the VAT back if you sell the property either freehold or lease over 21 years, under the criteria set out in section 5 of Notice 708. If, on the other hand, your plan is simply to lease the new apartments on normal short term leases, then the rental income would be exempt from VAT and you wouldn’t normally be able to recover the VAT you’ve paid on the conversion costs. You might be able to recover the VAT under a sale and lease arrangement but I won’t go into any more detail on that here as it is planning advice.
I know that these rules seem simple but the reduced rate and VAT recovery mentioned above only apply if your development meets the exact criteria as explained by HMRC.
You might also want to have a quick look at my article here http://tinyurl.com/9x7zmgd. The main subject is buying properties VAT free for conversion but I’ve discussed some of the issues mentioned above in a bit more detail.
I hope this helps, but please appreciate that this is only general information and if you want any more detailed information, I’d recommend that you take professional advice.
Marie
