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Property Tax Portal by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, explains a VAT scheme that is commonly overlooked, but which could save a considerable amount of money!The buy to rent sector has been growing quickly over the last few years, particularly the refurbishment of existing older properties, but what VAT reliefs are available?

The Gloomy Picture for buy-to-let investors

The basic position for people entering this sector does not look good from a VAT perspective. The renting of residential property is exempt from VAT but the renovation or conversion of the properties is subject to VAT. So you incur VAT attributable to an exempt supply which means you can’t register for VAT or recover any the VAT you are charged.

The generous concession aimed at the renovators and developers

In 2001, a concession aimed at this sector was introduced and further extended in 2002, however, it seems to be little known by either builders or developers.

The scheme is known as the urban regeneration scheme, although it applies to all qualifying buildings wherever they are located. The idea of the scheme is to provide a reduced rate of VAT on work designed to upgrade existing housing stock.
The problem is that so few people know about the scheme a lot of investors are still paying the full 17.5% in error.
The reduced rate is 5%, which gives an absolute saving of 12.5% on refurbishment costs.

The reduced rate of 5% applies if you are:

• converting a non-residential building into a residential building, for example a barn or warehouse conversion;

• you change the number of “single household dwellings” within a property, for example convert a large old house into four flats, convert a bet-sit back into a single house;

• convert flats or a house into a bed-sit;

• refurbishing a residential property that had been empty for three years or more; or

• convert premises for use solely for a ‘relevant residential purpose’, for example a children’s or old peoples home (but the developer has to provide a certificate to the builder to secure the lower rate of VAT).

To make things more complicated if you are refurbishing a block of flats and change the number of flats on some floors but not others then the reduced rate will only apply to certain parts of the building.

For example, you have a five story block of flats with three flats on each floor.

The top floor is converted into one flat, so it is eligible for the reduced rate as you have changed the number of flats, the fourth floor has the internal walls moved and the size of the flats changed but the number of flats remains at three, so the reduced rate will not apply to this work. The remaining floors are converted into two flats per floor so they are eligible for the reduced rate.

Details of the scheme are contained in VAT Notice 708, so if your builder has not heard of the scheme, print off a copy of the leaflet from the HMRC website and show him the relevant sections.

The scheme only applies to properties capable of separate disposal, i.e. each house or flat can be sold separately (even if you are only ever going to rent them out), so it will not apply to the construction of extensions and “granny flats”.

The 5% rate only applies to the services of the builder, you cannot buy materials at the reduced rate, they will still be supplied with 17.5% VAT so if you do the work yourself the scheme will not apply to you.

Andrew Needham

The above article is reproduced courtesy of Property Tax Portal. For property tax savings tips, secrets and strategies, click here