VAT on construction of a guesthouse

[Boolinks]

Hi
I am about to start construction of a guesthouse which includes owners bedroom and lounge. The owners would share the kitchen and dining facilities.

Is the guesthouse classed as a Live-Work Unit?

If so under Buildings and construction (VAT Notice 708) Live-work units 16.4.1

...it may be treated for VAT purposes as if it were entirely a dwelling and no apportionment is required where a unit has neither:

an area that must, as a requirement or condition of planning permission, be used for commercial or industrial purposes
planning permission requiring a certain percentage of the floor space to be used for commercial or industrial purposes

Thank you in anticipation.

[les35]

Whether the guidance in para 16.4.1 applies will depend, I think, on the terms of the planning permission. If planning essentially treats the structure as a domestic dwelling it will be entirely zero rated. Other restrictions in the planning may mean, for example, it cannot be a dwelling for VAT purposes, so the construction would be entirely standard rated. Or, as per the guidance, you may have to ask the contractor to apportion between standard and zero.

[Boolinks]

Thank you for your response.

If VAT is charged by the contractor am I able to reclaim the circa £50,000 in VAT plus VAT on other business purchases?

If so can I set up a VAT registered business now in readiness?

[les35]

If the contractor charges you VAT on the development of the guest house element of the property you can claim the VAT back. But, if you use the guest house space personally without payment, then you will have to reduce the proportion of VAT claimed.
I would certainly apply for VAT registration.

[Boolinks]

Thank you for your advice - further questions if I may:

If I derigister at some point after we have been trading for a period because trade ends up being below the VAT threshold, do we have to repay any VAT claimed during construction and fit out.

Also have we effectively elected for VAT on the building requiring us to levy VAT should the building ever be sold.

Thank again

[les35]

Deregistration brings with it two matters:
- HMRC are not obliged to deregister you; and
- you will have to make a VAT adjustment back to HMRC under 'Capital Goods Scheme' rules. This will certainly apply if you were to deregister within ten years of completion of the development.
The sale is a different matter - the sale of a non-commercial building is exempt from VAT. But a guesthouse straddles the line between domestic and commercial, so please do not rush into this without clear professional advice.

[Boolinks]

Hi
The capital goods scheme has a capital expenditure minimum threshold of £250,000 + VAT. Please advise if I can claim expenditure of less than £250,000 if so how.

Regards