Q:
Hi,
Am considering buying a commercial property that has VAT payable but want to convert to residential immediately. I was told that it is possible to avoid the VAT if the property is converted within a set timescale of two years or similar. Can anybody verify this and how/where can I find out more?
Thanks in advance!
A:
Hi,
Yes there is such a scheme. You can find details of it in section 3 of VAT Notice 742A: Opting to Tax Land and Buildings here on teh HMRC website: http://tinyurl.com/3g32uz.
Normally if a commercial property owner/vendor has opted to tax a property, he has to charge VAT when he sells it. But if the purchaser intends to use or convert the property as a dwelling/dwellings or certain types of residential use, he can give the owner a certificate (Form VAT 1614D) which means that the owner can’t charge VAT on the sale.
The important point is that the certificate must be given to the owner/vendor BEFORE THE PRICE IS LEGALLY FIXED, ie before contracts are signed, heads of terms etc. So it’s important that you do this before anything is agreed about price.
The details are in the Notice and the Form can be downloaded from the HMRC website here http://tinyurl.com/le7vfh.
It’s normal in these cases for the sales contracts to include reference to the VAT issues so your solicitor will probably need to know what you’re planning to do before he starts to draw up the documentation.
Marie
Q:
Hi Marie
A friend has done a similar transaction, but with a difference. He bought a commercial property in London 2 years ago. At that point is was yr 24 of a 25yr lease. The building was opted to tax, but no VAT was applied to the purchase because TOGC (he set up a VAT reg UK LLP as the purchasing entity). Now the lease has ended, tenant has vacated. No new tenant has been found for the offices since last summer and there is a new plan to convert to residential. What are the VAT rules around the conversion to residential, in terms of un-opting to tax? Is there a VAT charge on un-opting? If that VAT charge is merely a recapture of input tax recovered by LLP that will be ok, because the amounts are small. If there can be a VAT charge on some kind of deemed sale of the building at fmv (£4mill, say) that would be much more difficult. Please can you point me in the right direction?!
Thanks and best wishes with VATExchange
John
A:
Hi John
Unfortunately I have to plead the fifth on your query as it’s not one of those queries that can be answered by referring to a couple of paragraphs in a VAT notice. In situations such as the one you outlined, the VAT position could change significantly depending on a variety of factors, particularly the final use of the properties, i.e. will the owner sell the converted building or lease/ sell the individual units?
I know that you appreciate how complex these rules can be but in the circumstances that you describe, it could mean the difference between repaying some input tax or paying VAT on a deemed supply at 20% on £4m, i.e. £800k, so giving the wrong information could cause problems. And if the converted properties satisfy certain conditions, the sale or long lease (over 21 years) of the units may qualify for zero-rating in which case there would probably be no VAT cost.
Trying to summarise the rules that could apply here would just take too long.
There could also be a further complication caused by the fact that the property was acquired as a TOGC which could increase the VAT charge and also require the property owner to repay input tax that was paid by the previous owner.
Although I can’t give you a quick reply here, I’d be happy to have an initial chat with you about this as I can talk much more quickly than I can type! If you then want any more detailed advice, I can provide that through my consultancy service. Send me an email through the contact form and I’ll give you my contact details so you can call me.
Marie