I recently read somewhere that you have 3 seconds in which to grab the attention of any potential client or customer. I suppose that’s why the BBC is always looking for “soundbites”, to try and summarize major new stories in a few words.
So here’s my 3 second soundbite:
- Most new construction is zero-rated
- Certain conversion and refurbishments qualify for reduced rate.
- Developers can claim VAT from HMRC in certain situations if they sell or grant a long lease in a new or converted non-residential property.
Okay, so it’s more like 5 seconds. But you get the drift. Problem with “quick” summaries is that they can be very misleading.
I’m still taken aback when asked if I can quickly remind them how how VAT applies to property development or when they can recover VAT from HMRC. I always do my best to help but this really is one of those situations when a bit of information is a bad thing.
Like all soundbites, it oversimplifies the subject. Having a tiny bit of knowledge like this can actually create more problems. I’ve seen many situations when property developers prepare business plans on the basis that their construction qualifies for the zero-rate or that they can claim VAT on conversions from HMRC only to find that their developments don’t meet the criteria AND/OR that the conversion work doesn’t qualify for the reduced rate. Some developers spend more time agonizing over the bathroom design than working out the VAT cost of their development and end up with anything from 5% to 20% irrecoverable VAT on their construction costs, which can make quite a dent in carefully calculated profits or used to buy 100 bathrooms, if only they’d thought about it before they started spending money.
Most property developers and contractors are familiar with the application of the zero-rate to new residential construction and sales. It’s the 5% rate that causes confusion. And it’s not surprising given that the conditions for the 5% to apply are much more complicated than the zero-rate for new construction.
For example, the reduced rate of 5% applies to certain residential conversions, including those that create additional dwellings in existing properties. However in order for the reliefs to apply, the “dwellings” have to meet specific criteria. Also, the 5% rate won’t always apply to ALL of the work done, because one of the clauses in the legislation means that you have to consider the number of dwellings in each part of the property, not just the property as a whole.
And in some respects the situation can be worse for DIY developers. I’ve seen MANY situations over the years when a couple have bought an old property to convert into their family home, assuming that they can claim the VAT from HMRC, only to have their claim rejected because they haven’t understood the rules properly. It’s bad enough when it’s a business development, but it can cause an awful lot of grief and frustration when it’s your family home and you find yourself with a gaping gap of £30,000 or £40,000 and the bank won’t extend the mortgage and you end up having to sell the beautiful newly converted property which you’ve planned and put your heart and soul into creating.
That’s why I decided to focus on conversions and refurbishments in my new book. I’d originally planned to write a short guide about conversions but realized that it would actually be a bad thing to give people only part of the picture.
If you want a bit more information about VAT reliefs for residential property development, here’s a slightly longer list which summarizes the most common scenarios and the type of relief that might apply.
But if you want to understand whether the reliefs apply to your own development, you need to do a bit more homework on the subject. HMRC’s VAT Notice 708 “Buildings and construction” is the best place to start for the main rules. And my new book is a good place to find out how the rules work in practice and more information about the subject.
Either way, I hope you’ll take the time to learn the rules that apply to your development so you don’t end up with unexpected VAT bills. You might even be pleasantly surprised to learn that you can save more VAT than you’d originally anticipated. But you MUST do your research at the planning stage – it’s usually too late to change things once you’ve started to spend money.
Marie
March 2014