In the past few months, I’ve had queries from a couple of developers about claiming VAT on costs. In both cases, the developers have converted old residential homes into apartments, selling or intending to sell long leases in the newly converted apartments. They have assumed that the sales are zero-rated, so have submitted claims for VAT on related costs.
HMRC has refused their claims because the sales do not qualify for the zero-rate. Sales of converted properties only qualify for the zero-rate if the property is a “non-residential conversion”. This means that the property was previously either:
- a non-residential property; or
- a dwelling that has been unoccupied for at least 10 years.
A non-residential property means that the property is not, or has not been used as either a dwelling or for relevant residential purposes. While converting such a property into dwellings may qualify for the reduced rate of 5%, this does NOT mean that the sale of the converted property is zero-rated.
I have discussed this issue in depth many times – see my blog about “VAT and non-residential conversions” where I explain the rules. But it is an issue that comes up time and time again. The developers mentioned above have lost significant amounts of money because of this rule, in one case over £80,000 VAT, simply because neither they nor their accountants had correctly understood the rules.
So I’ve written this short blog as a reminder to anybody, whether developer, investor, accountant or other professional adviser, that there are 2 separate and distinct definitions for the word “conversion”:
- Changing the use of a residential building can qualify for the 5% rate on construction services.
- The first grant of a major interest in a non-residential conversion by the person converting can be zero-rated
However these rules and definitions are not inter-changeable.
You need to check HMRC’s guidance in VAT Notice 708: Buildings and construction, or in my book “VAT for residential property developers and contractors” for full details.