Value added tax (VAT) is relatively new tax. In the UK, it was introduced on 1 April 1973. However, it accounts for about 17% of UK government’s total revenue.
As name suggests, VAT is a tax on value added. A businessman collects VAT on sales while pays VAT on its purchases. The net of the VAT collected from customers less VAT paid to suppliers is payable to HMRC by the businesses.
Generally, residential landlords do not need to worry about VAT. However, as we will discover later, landlords and property developers may be able to claim VAT they paid for building works carried out by them.
In the UK, the standard rate of VAT is 20%. However, there are also other two types of VAT rates: zero-rate (0%) and reduced rate (5%) which are applicable in special situations.
General rule is that if a supply is Vatable (whether it is 0%, 5% or 20%), you can claim back the VAT paid to suppliers. However, if a supply is exempt, you can’t claim back the VAT you paid. So, you will benefit most if the activity you are carrying out is zero-rated. This principle is very important for property developers and landlords which we will discover later.
Details of VAT returns, deadlines and how to submit can be found in HMRC website.
Residential lettings is exempt from VAT, and so majority of landlords don’t have to think about VAT at all. This VAT exemption applies whether it is single-let, HMO or Rent2Rent residential letting. However, serviced accommodation is NOT exempt as it is treated as holiday accommodation and so standard rated.
As mentioned earlier, serviced accommodation is taxable supply, and 20% VAT applies on the total amount invoiced to the lodger. However, if your annual sales is less than the VAT registration threshold which £85,000 for the tax year 2017/18, you are exempted from registration. As a result, you don’t need to worry about VAT until your annual sales exceeds the threshold, or you expect sales to exceed the threshold.
As serviced accommodation is becoming popular strategy because of Airbnb & Booking.com, property investors carrying out this strategy need to be really careful about the VAT obligations. There will be hefty fines & penalties for not registering a taxable business for VAT. Contact us now if you run serviced accommodation business to discuss the VAT implications for you.
New residential development is zero-rated so that you can claim back the VAT you paid to suppliers for the development work. As a simple example, if you spent £1.2 million on a property development project which includes £200,000 of VAT, you can claim back £200,000 VAT from HMRC. However, the rules around this are quite complicated, and so it doesn’t work as simple as this.
To be eligible for this, the supply should be first grant of a major interest of dwellings, relevant residential properties or relevant charitable properties. Major interest means freehold or lease more than 21 years. Construction of dwellings, student accommodation and care homes generally qualify.
Another area of generous VAT relief for property developers is the conversion of non-residential property to residential property. This is also zero-rated which means you can claim back the VAT you paid on the construction work.
Some of the examples of this type of work: conversion of a pub to residential flats and conversion of a factory to residential property
The qualifying conditions for this is similar as for new-built residential above. As mentioned earlier, the VAT legislation for this area is quite complicated, and it is advised to seek advice from property VAT specialist.
Reduced rate of VAT at 5% is applicable on certain qualifying services supplied for Residential conversion. The basic rule to be eligible for this is that there must be change in the number of dwellings by the conversion. For example, if you convert a three-bedroom house to two flats, you will be eligible of reduced rate of VAT.
The conversion of single occupancy dwelling to multiple occupancy dwelling qualifies for reduced rate of VAT. So, if you convert a three-bedroom house to a HMO, the conversion work qualifies for reduced rate of VAT at 5%. To qualify for reduced rate, you must obtain necessary planning consent and building control approval for the works.
Sale of freehold in an uncompleted or new commercial building is standard-rated (20% VAT). If you sell newly constructed office building with freehold, VAT at the rate of 20% needs to be charged. However, lease of a commercial property or old commercial building (older than 3 years) are not taxable unless option to tax election is made.
Whenever there is an exempt supply of commercial land or buildings, the owner has the option of changing it to standard-rated supply by “option to tax” election. The main benefit of this election is that the VAT paid on by the landlord on regular expenses & building work can be recovered from HMRC. The option is made on building by building basis, not on the whole portfolio of properties.
Suppose you bought a new commercial building for £1 million. As this is standard-rated supply, the developer will charge you VAT of £200k. If you opt to tax, you can recover the VAT of £200k paid – otherwise, you will lose £200k. So, it makes sense to elect for ‘option to tax’.
As VAT on commercial property is quite complicated area, please contact us to discuss how it applies in your case.
We have Property VAT specialist in our team to guide you on these complicated VAT legislations related to property. Whether you are property developer, commercial landlord or a residential landlord, we can help you to save VAT and claim VAT refund from HMRC. As most of the tax planning needs to be done well in advance, please contact us now if you are planning to carry out any major building work or purchasing a commercial property.