17 Oct VAT for property: Zero-rated & Exempt
If you are considering to make a property transaction, it is critical to understand the difference between exempt and zero-rated VAT. Here are the basics for your reference.
If you have an existing residential property (i.e. a house) that you rent or sell, then you should certainly be able to make an exempt supply for VAT purposes. What this means to you is that you don’t charge VAT. However, you are also unable to recover the VAT you incur on the purchase of services or goods related to it. So, if letting domestic property is your only business activity then you typically can’t register for VAT.
Now, when it comes to freehold sales of new domestic property, it is usually zero-rated, meaning no VAT is charged but, in this case, the builder can recover VAT on the costs related to construction.
For non-residential properties (i.e. a barn) that you want to convert, things are more complicated and everything depends upon the previous use of the building, which will determine whether VAT should be zero rated, exempt or even a mixture of both and how much VAT on the costs you can recover. You may also be eligible for a reduced VAT rate applied to conversion work. However, most contractors prefer the safe road and charge the standard 20% rate on all their projects, even if, in some cases, they could charge a reduced VAT rate. So, your builder should be knowledgeable enough as per the correct VAT treatment or else you will have to persuade them. Truth be told, though, the rules for builders are quite complex, so always consult an accountant.
Note: If you build a new residential property that you intend to sell (either under a long lease of freehold) and decide to let it out temporarily (with a short-term lease) then you should know that you might be asked for a partial refund of the VAT you have recovered from the project.
There is a special VAT treatment for holiday accommodation. Usually, the purchase of a new holiday home is subject to VAT, despite the fact that you may end up selling the building VAT-free. In general, holiday owners can register for VAT and recover the charged VAT.
Supplies of commercial property is VAT-exempt (by default) although there are cases when VAT is indeed charged (i.e. when the freehold sales of the new building are subject to VAT or due to the VAT option to tax).
Option to Tax
When you opt to tax, you send a notice to the HMRC informing them you want to charge VAT on the property, which is usually automatically allowed unless permission is required. However, when the building is going to be used for a charitable or residential purpose, an option to tax won’t apply, and the supply is VAT exempt. Ask your accountant for other exceptions that have been introduced to prevent tax avoidance.
One opts to tax property so that they can recover VAT on the costs related to the building or its purchase. The concept that you can recover VAT on a property only if you opt is just a myth. Everything depends on the use of the building. If you don’t intend to let it and use it for your business, then you most certainly can recover the VAT. In practice, the majority of firms don’t need to worry much about VAT being charged on rent as they can recover VAT.
Note: Assuming that the option to tax is automatically transferred once you make the purchase of a site or building is a common misunderstanding. Better discuss this with your accountant to avoid costly and difficult-to-make corrections in the future.