The easiest way to save 20% on residential property development.
If you’re a residential property developer, please read this before you pay a deposit, sign anything or go to the auction. It’s the easiest way to save 20% VAT on residential property development
Spending 5 minutes reading this blog could be the most cost-effective time investment you will ever make.
In this past year, I’ve received about half a dozen calls or emails from property developers who have ended up paying large amounts of VAT on property purchases that they may not be able to recover.
The frustrating thing about this is that if they’d contacted me about a week earlier, they could all have avoided paying the VAT in the first place.
Plus if the purchase is liable to stamp duty land tax, this is charged on the VAT element as well as the property cost, adding to the cost.
The free information
Normally residential properties sales are VAT exempt. However commercial property owners can opt to charge VAT on their properties, which means that the sale price would normally be liable to VAT at 20%.
To prevent this anomaly, if you’re buying a commercial property which you intend to use as or convert for use as a dwelling, VAT law includes a procedure which enables you to buy the property VAT free.
THE VENDOR CAN’T CHARGE VAT IF YOU’VE ISSUED A VAT 1614D CERTIFICATE BEFORE THE PRICE IS LEGALLY FIXED.
The procedure is explained in VAT Notice 742a, section 3.4 http://tinyurl.com/nsh6es4.
But you MUST issue the certificate by the date on which the price is legally fixed.
What if I’m late with the certificate?
As explained in HMRC’s guidance, vendors can accept late certificates as long as they are issued before completion. But this is at the vendor’s discretion – you can’t make them accept it.
And if they don’t, then they must charge 20% VAT on the sales price.
Will the vendor want to charge a higher price if he can’t charge VAT?
Possibly. If the vendor has to sell the property to you exempt from VAT, he may have to repay some of the VAT he’s paid on property related costs in previous years. This includes where he’s incurred VAT exclusive expenditure of £250k or more on the purchase or certain work to the property in the previous 10 years. It may also mean that he can’t recover VAT on costs relating to the sale, such as the agent’s fees and solicitor’s fees.
Vendors will sometimes advertise property prices as “VAT exempt price” or “VAT exclusive price plus VAT”, where the “VAT exempt” price is higher for that very reason.
EVEN IF YOU’RE ONLY CONSIDERING MAKING AN OFFER ON A PROPERTY, YOU CAN ISSUE THE CERTIFICATE TO THE VENDOR BEFORE NEGOTIATIONS BEGIN. This means that the vendor can take account of any VAT he has to repay to HMRC or irrecoverable VAT on costs during the negotiation process.
But surely I can recover the VAT on my VAT return?
No. Not always. You can only recover the VAT in certain circumstance if your conversion qualifies as a “non-residential conversion” and you sell the freehold or a lease over 21 years. So you could end up with a VAT cost that you might not be able to recover. And even if you can recover the VAT, you still have to find the cash to fund the payment and then wait until HMRC agree to pay your claim.
Surely there’s catch to this? It seems to be too good to be true
There’s no catch. The VAT legislation is specifically designed this way to enable residential property developers to purchase commercial property VAT exempt. The important thing is that you issue the certificate in time or the vendor will have to charge VAT.
As for telling you this information for free, there is certainly no catch. The information, like all VAT rules, is available free of charge on the HMRC website. The only reason that people don’t know is that people know where to look.
If you ask me how to buy a property VAT exempt, I’ll always give you this piece of information without asking for any fee or to sign up as a fee-paying client or any other condition. I’ll refer you to the HMRC website where you can find the information and the certificate that you need to issue. It will take you about 10 minutes to read the HMRC guidance on the subject and maybe 30 minutes to complete the form. If you include the time spent reading this blog, it will probably be the most cost effective 45 minutes you ever spend.
The main reason I’m blogging about it is simply that I can’t help when property developers contact me AFTER they’ve agreed the price or even after buying the property and ask how they can claim back the VAT.
The subject of VAT recovery on property costs is very complicated and I’ll be dealing with this subject and other issues in my upcoming book about VAT on residential developments and conversions. If you want any more information about the subject, you can buy the book or ask me for formal advice.
But to be certain of saving up to 20% VAT on the property cost, you have to issue the certificate BEFORE the price is legally fixed. That’s why you need to know about this rule in advance to get the benefit.
I’ll be issuing my book “VATWoman’s Guide to Residential Developments and Conversions” in November. For more information, follow this link http://tinyurl.com/n9q8lje.