I’m always being asked about the easiest ways to save VAT on property developments, particularly conversions. But it’s not always easy because the VAT rules have 2 different ways of saving VAT on conversions. So you have to know: when is a conversion not a conversion?
VAT relief comes in two main forms:
- the contractor can do work which qualifies for the zero-rate (usually new residential construction) or the reduced rate of 5%(certain residential conversions or refurbishments); and/or
- the developer – whether a commercial developer or DIY developer building or converting a new home – can claim the VAT on costs from HMRC.
So on the one hand, you can save VAT on the cost of the construction work; and/or you may be able to claim VAT on the construction work and other related costs from HMRC. The key is understanding which rules apply in which situation and how the reliefs work together. And that’s where things get complicated.
Here’s a good example. Certain conversions of existing properties to create additional dwellings qualify for the reduced rate of VAT on the conversion services, so the contractor need only charge 5% on that value of the work.
The law also says that in certain cases, developers of new residential property or certain properties that are converted into residential property who sell the freehold or a long lease can register for VAT and recover VAT on the costs, because the income from such sales is zero-rated for VAT purposes, or if they’re building or converting a property into their new home.
So it means either a lower VAT rate on expenditure and/or VAT recovery.
It all sounds quite logical when summarized in a brief sentence. And I’m pretty certain that’s how the parliamentary draftsmen explained the reliefs to their parliamentary ministers. But neither the draftsmen nor the ministers actually have to apply the rules in practice and it’s a lot easier said than done.
First of all, the actual rules themselves are detailed.
You don’t exactly have to be a member of Mensa to understand them (I’m certainly not!!) but even though the basic principles seem to be logical, you have to spend some time making sure that you understand the terminology and the “small print”; i.e. those bits of the legislation that define the extent of the reliefs.
But the most stupid aspect of the rules is that there are different definitions for the words “dwelling” and “conversion”. For example, to qualify for reduced rated conversion work, the property AND the type of conversion have to fulfill certain conditions. But to qualify as a “conversion” for the purposes of claiming VAT on costs, the the property AND the type of conversion have to fulfill completely different set of conditions. In some cases, both conditions will apply, on others only one. But you have to be know because both issues affect the VAT cost of each residential development.
IT’S NO WONDER THAT DEVELOPERS AND CONTRACTORS MAKE MISTAKES DEALING WITH VAT WHEN THEY HAVE TO APPLY DIFFERENT DEFINITIONS TO EVERY DAY WORDS
The information is readily available for contractors and developers – HMRC’s VAT Notice 708 “Buildings and construction” is the best place to start for the main rules. Sections 3, 7 and 8 deal with the VAT liability of construction services, sections 4 and 5 deal with the zero-rating for sales of new and converted residential properties, while section 14 includes the all important definitions.
The most important thing is to be aware of these distinctions and know where to find the information. Also, it’s best to sort out the VAT liability and VAT recovery position of your development as part of the planning process so you can work out how much money you can save by taking advantage of both types of VAT reliefs. If you want to be certain that you’ve understood the rules correctly, it’s worth investing in some advice from a VAT consultant. The cost of a consultant is often met by additional savings, but even if your development doesn’t qualify for relief of either kind, it’s better to know for certain rather than find costly errors later on.
And each time you start another development, you’ll be learning more about the subject and be able to plan your development to take advantage of as many reliefs as possible.
Marie
March, 2014