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It’s common for a company to start a property development project intending to use it for business purposes, only to decide later to convert it into a personal residence. This switch may be inspired by various factors, one of which could be the business owner becoming enamoured with the property and want to live in it. We have detailed the VAT implications associated with such changes in this blog.
Different Scenarios, Different VAT Implications
It is important to understand that the VAT implications can differ greatly depending on various factors. These include the type of property development and the legal structure of the entity carrying out the development.
Building a New Residential Property
When a limited company builds a new residential property, and the company director decides to reside in it along the way, the company can continue to deduct VAT on construction costs. Upon completion, transferring the property to the director is treated as a VAT-free, or zero-rated, transaction. Hence, there would be no need to repay any VAT claimed previously by the company.
In a partnership, if one partner wishes to acquire the house, the same rules apply as in any other situation. However, if the property is owned by a sole proprietorship or a partnership consisting of only a husband and wife, they cannot sell it to themselves due to legal restrictions. This prevents them from taking advantage of the zero-rated VAT.
Renovating an Existing Residential Property
In most cases, the expenses associated with maintaining, repairing, and improving a residential property are considered part of a future supply exempt from VAT. This is because the property will either be rented out or sold in the future. Since this future supply is exempt, any VAT paid on related expenses cannot be recovered. Since the onward supply of a renovated residential property is considered exempt, a business cannot claim back the VAT on renovation costs. Consequently, even if the individual decided to reside in the renovated property, they could not reclaim the VAT.
Converting a Commercial Property into Residential Use
If a business transforms commercial premises into residential property, the VAT implications are similar to building a new residential property. A limited company could provide the property to the business owner as a VAT-free supply. But if a sole proprietor or all partners in a partnership are involved, any VAT incurred after the decision to change to private use could be claimed under the DIY Housebuilders Scheme.
What About the DIY Housebuilders Scheme?
A handy tip for sole proprietors or partnerships is the DIY Housebuilders Scheme. If they use the property partway through the project, they can apply for a VAT refund on the materials purchased via this scheme. VAT incurred on eligible goods and services purchased after the change of intention can be claimed back through this scheme in the traditional way.
It is important to note that if the intended use of a property is changed, a business registered for VAT may be required to disclose VAT on transactions in which they have already claimed input tax. This implies that they might have to include the previously deducted VAT because of the change in use. It is always advisable to seek professional advice before making any changes to the use of a property to avoid any potential issues with VAT compliance.
Historical Changes in VAT Rules
Before 2011, a sole proprietor could treat the onward supply as a business supply of construction services and materials, allowing the supply to be zero-rated or reduced-rated. However, post-2011, this choice is no longer available. VAT can only be reclaimed so that the services and materials will be used for taxable business purposes.
Understanding the VAT implications when a business property is used for personal purposes can be difficult due to varying regulations and possible scenarios. It’s always a good idea to consult with a VAT specialist or tax consultant to clarify your position and ensure compliance with all relevant tax regulations. If you need help with Tax Planning or Tax Compliance; we have tax experts who can help you. Call our office to discuss your circumstances.