How to make a 12.5% profit from the VATman
One of our subscribers was converting an old office building into flats and asked us whether there were any top tax tips we could give her. She had done her research and was pretty clued up, but she nearly missed out on a big VAT saving.
Residential conversion
Our subscriber is a businesswoman with a keen eye for a profit and couldn’t resist the chance to buy an office building which had been vacant for a long while. Like many town centre offices, it had originally been a large house so she thought converting it into flats should be a breeze, although she didn’t expect it to be cheap. However, the good news is that there’s a VAT break which will save her thousands. And it’s not just property developers that can take advantage of this.
Tax break - conversion costs
Where you buy an office building, or other commercial premises, e.g. a warehouse, and convert it into flats or any other kind of dwelling, it counts as a “residential conversion”. This qualifies you for a reduced rate VAT charge of just 5% on all the costs involved. So, for example, where you spend £47,000 including VAT on materials for the job, you could reclaim £5,000 of this from the Taxman, which is a nice boost to your profit.
Trap. You’ll be charged standard 17.5% VAT on building materials if you buy them direct from the suppliers, and unless you operate as a property developer you won’t be able to claim the 12.5% VAT discount.
Tip. Buy materials via your builder and ask them to bill as part of the overall job. As long as they’re registered they’ll be able to reclaim the 12.5% VAT discount and pass it on to you. And of course the 5% VAT rate will also apply to their bill for labour. This tip made our subscriber pretty happy, but it’s not the only situation where the 12.5% reduction of VAT can apply.
Change in number of units
The 5% rate of VAT will also apply if your building project results in a change in the number of residential units in an existing dwelling.
Example. John owns a detached house which he converts into two semi-detached properties. The change in the number of residential units from one to two means all building work qualifies for a 5% VAT rate. The reduced rate applies irrespective of whether the number of living units is being increased or decreased.
Empty properties
Building work also qualifies for the 5% VAT rate where it’s carried out on a dwelling that’s not been lived in for at least two years. For example, if your late grandmother’s property has been vacant since her death 18 months ago, and you’re intending to do it up to make it easier to sell, consider holding on for another six months, at which time you’ll qualify for the 12.5% VAT reduction on materials and labour.
Trouble with the builders
In our experience, some builders get twitchy over charging just 5% VAT on conversion work, as they’ll be the one to cop it if the Taxman disagrees.
Tip. Give the builder a copy of this article and chapters seven and eight of VAT Notice 708 (see The next step). The Taxman’s advice is clear, so it should be enough to put your builder’s mind at rest.
For a web link to Notice 708, visit http://tax.indicator.co.uk (TX 10.19.05).
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