VAT and property
For those businesses operating in the property sector, VAT is one of the most important taxes to consider. Throughout the life cycle of a property, from design to construction, to the first grant of a major interest to renovation and disposal, the VAT implications should be understood.
Our local property team has specialist VAT capabilities within the property sector and can help steer you and your business through the complex legislation. This will help you to be both compliant with the rules and also claim any tax reliefs and exemptions that are valuable, thus maximising your returns.
Areas in which we can help are:
Many complications can arise when purchasing real estate. As a result, there are several things to consider when deciding on the correct VAT treatment.
The purchase of commercial land and buildings are generally exempt from VAT, however, the seller has the option of making the supply taxable by submitting an Option to Tax to HMRC. Furthermore, if a commercial building is less than three years old, the purchase will be compulsorily standard rated.
If you are purchasing a residential property, designed as a dwelling, the purchase will be exempt from VAT except for the first grant of a major interest, which is zero-rated subject meeting the relevant conditions.
There are additional complexities if you are purchasing a building that is used for a relevant charitable purpose or a relevant residential purpose.
The development stage
Particular attention is required when a new building is being constructed. Initially, you need to establish what the building is being used for. The use of the property dictates the VAT rates to be applied throughout the construction process. The VAT rates are applicable –
- Commercial buildings – VAT is chargeable at 20%.
- Buildings designed as a dwelling – VAT is chargeable at 0% on services in the course of construction of a dwelling.
- Relevant Residential buildings – providing a valid certificate is provided and other conditions are met, construction services may be zero-rated.
- Relevant Charitable buildings – the construction services provided in the course of construction of a relevant charitable building are similar to those provided when constructing a relevant residential building. They may be zero-rated provided that a valid certificate is provided by the charity and all other conditions are met.
When applying the zero-rating provisions, there are a series of conditions that must be met. Failure to do so may result in an alternative VAT rate being applicable.
There are always exceptions to any rule where VAT is concerned. Please find below the main exceptions to the zero rating when providing construction services –
There are a limited number of services that will always be subject to VAT at 20% regardless as to what is being built, the most common being professional fees. A way to avoid this would be to contract on a design and build basis with the construction company.
The zero rating extends to the renovation works on a dwelling that has been empty for a period of 10 years or more before the work commences. Evidence to support this is required and is available from the Local Council.
An extension or enlargement to any existing building whether it be a relevant charitable building, a relevant residential building or a building designed as a dwelling is standard-rated.
VAT on conversion
Particular rules apply when converting a building to a different use. By different use, this can mean changing the number of apartments within an existing development, making some units bigger and some smaller or changing the physical use of the building from commercial to residential.
The most common conversion is that from a commercial building into several dwellings. The VAT rate applied to services in the course of conversion is 5%. The reduced rate also applies to renovation works to a dwelling that has been empty for a period of two years or more immediately prior to the commencement of work. It is only the services provided in the course of conversion that attract the 5% VAT rate. All other goods and services will be taxable at 20%.
VAT on sale
The sale of a property can be either of the following: Zero-rated, Exempt, Standard rated or
Outside the scope of VAT depending on the situation. When selling real estate, VAT is possibly the most overlooked tax. This not only has the possibility of delaying the transaction, but may also result in the sale ‘falling-through’.
The type of property being sold dictates the VAT liability of the supply. Another important point to mention is that it is always the vendors responsibility to get the VAT liability correct. Failure to do so can result in HMRC issuing penalties and interest in addition to the assessment of VAT that has potentially been underpaid.
- The sale of the property typically reflects that of the purchase with the additional complications of the Transfer of Going Concern relief. Please find below a brief overview of the VAT treatment for real estate transactions –
- The first time sale of a building designed as a dwelling is zero-rated, with subsequent sales being exempt from VAT (unless the property has been empty for a period of ten years in which case zero-rating may apply).
- The first time sale of a building that is solely used for a relevant residential or relevant charitable purpose may be zero-rated provided that certain conditions are met. Subsequent sales of charitable buildings may be exempt from VAT or standard rated depending on whether or not the charity has opted to tax the building. With regards to relevant residential buildings, the subsequent sales are exempt from VAT.
- The sale of a new commercial building that is less than three years old is compulsorily standard rated. Properties falling outside of this will be exempt from VAT unless the vendor has opted to tax by submitting the relevant information to HMRC.
- Continuing with commercial properties, a common transaction is the sale of a tenanted property that has been opted to tax by the vendor. When determining whether the sale of a property rental business is subject to VAT the Transfer of Going Concern relief must be considered. If the relief applies to the transaction, the sale is not subject to VAT. It is considered to be outside of the scope of VAT. Various conditions must be met for the relief to apply to the transaction. If the Transfer of Going Concern relief applies, this will assist with cash flow and may reduce the SDLT due on the transaction.
The next step
For more information about the services we offer our clients in the property sector, please contact one of our advisers today.
Alternatively, visit the property sector page on our main website.