Minimise the VAT bill on a building conversion
You have purchased the freehold of an office block to convert into six flats to let commercially. You cannot claim input tax on the project costs because rental income is exempt. How can you minimise your VAT bill on the building conversion?
Basic Facts
You intend to undertake a building conversion , transforming an office block into six residential properties. You have the following anticipated project costs before VAT:
Freehold of block £500,000
Building materials £150,000
Labour £120,000
Professional fees etc. £30,000
In the worst case scenario, if all costs were subject to 20% VAT, this would give you a VAT bill of £160,000 for the building conversion .
How can you reduce this figure within the legislation?
Buying the property
The reason why the purchase will be subject to VAT is because the seller has opted to tax their interest in the building. However, there is an escape route to save £100,000 VAT being charged.
To take advantage, as the buyer, you should complete FormVAT1614D (see The next step ) before exchange of contracts and give it to the seller.
This confirms your intention to convert the building into dwellings and the seller’s option to tax election is overridden, i.e. it’s an exempt building sale again.
Tip. A common mistake is that buyers think they must have obtained planning permission to build dwellings before they can give FormVAT1614D to the seller. This is incorrect – it is the intention to convert into dwellings that counts.
Labour
Work carried out by builders where a non-residential building is being converted into dwellings is subject to 5% VAT.
This would include, for example, a public house you are converting into a house or, as in our case, an office block being converted into flats.
The 5% rate applies to all building work, including subcontractors working for contractors.
Tip. Many builders incorrectly think they must be issued with a VAT certificate from the building owner, confirming the 5% rate of VAT. This is not correct, as certificates are not needed for projects that involve dwellings.
Materials
All building materials you buy will be subject to 20% VAT. But you can save VAT by getting your builders to buy the materials and supplying you with labour and materials. This is because the reduced rate extends to materials provided by builders as part of their work.
Trap. You will need to ensure that your builders do not apply a big mark-up on the materials they buy – this will eliminate the VAT saving of 20% v 5%. You might need to share the VAT saving and they might be able to buy materials cheaper anyway because of trade discounts.
Your potential VAT bill has been reduced from £160,000 to £19,500, i.e. you are only left with a 5% VAT bill on labour and materials (£270,000 x 5% = £13,500) and 20% VAT (£6,000) on other costs.
You should issue the seller with Form VAT1614D to prove the intention of the building conversion before exchange of contracts to avoid paying VAT on the purchase. Make sure that your builders only charge 5% VAT on their services and materials.
You do not need to issue certificates to the builders to benefit from this lower rate.