Recent months have brought enquiries from people buying pubs, to convert for private use as their main dwelling, or to use for a mixture of business and private purposes.
I thought it useful to summarise the main VAT issues that arise for those investing in properties to convert into your own home.
This article isn’t for those buying properties for business purposes, such as buying to let, though some of the issues mentioned may apply.
It’s for those of you buying such properties for personal use.
Although this article focuses on buying a pub, the principles apply to the purchase of any type of commercial property you intend to using as a dwelling. The information given is for general information purposes.
Whilst your own situation may be similar to the scenarios below, I recommend you take proper VAT advice, whether from myself or another VAT adviser, before investing your hard earned money.
It is particularly important to do this if the vendor has told you that the building is liable to VAT, as you will have to take certain action before you exchange contracts or make any payment or do anything else that could “legally fix” the price, to avoid paying VAT.
For most of us, buying a home is the most costly purchase we make . I have seen situations where people have paid thousands of pounds in fees to solicitors, surveyors and agents and even gone to the expense of paying contractors to carry out conversion or refurbishment work on the property before realising that they haven’t taken into account the VAT on costs. This can mean the difference between having a financially viable and saleable home or a very beautiful but overpriced property.
Please bear in mind: no matter how good your solicitor, or experienced your building contractor and how well the property agent knows the local market , none of them will be able to advise you properly on the VAT implications of your proposed purchase.
Purchasing the property
As private individuals, most of us will have purchased our homes free of VAT, because the VAT legislation either exempts or zero rates the sale of dwellings. This means that most of you won’t have come across the concept of paying VAT on property. This is in keeping with EC VAT principles that the supply of homes for private individuals should be free of VAT.
On the other hand, most new commercial properties are liable to VAT and owners of older commercial properties can “opt to tax” their properties, a procedure which means that they normally have to charge VAT on rent or sale proceeds.
Most homebuyers will be surprised if told that the vendor has opted to tax the property and will be charging VAT on the selling price, but it’s not necessarily a problem as there is a procedure that enables you to (legally!) avoid paying the VAT.
Furthermore, even if the vendor has opted to tax the property, VAT can only be charged on that part of the property used for commercial purposes. So, in the case of a pub or similar property, VAT should never be charged on any existing dwellings, such as a self-contained flat. Vendors should apportion the selling price between the commercial part and any dwellings, so that they only charge VAT on the commercial property.
Using the certificates
You would only be charged VAT if you purchase an existing commercial property or part of a commercial property – such as a pub - for use as or conversion into your home.
However, it is possible to prevent the vendor from charging VAT by issuing a certificate to him confirming you intend using the property as a dwelling. As long as the vendor receives the certificate before the price for the property is legally fixed (see below), he must sell the property to you free of VAT.
You can find guidance about the use of such certificates in HMRC's VAT notice 742a: Opting to tax land and buildings which is available here .
Section 3 of the notice explains when such certificates can be issued. Different certificates apply to situations when properties are to be used/converted as dwellings, or for certain other residential or charitable purposes .
The certificate applicable for conversions into dwellings is VAT 1614D which can be downloaded here .
These certificates must be given to the vendor before you legally fix the price of the property.
This is normally the earlier of the dates on which contracts are exchanged and/or any payment is made to the vendor. Most solicitors are good at ensuring that these certificates are in place when required, but it is your own investment so check up on the rules yourself and make sure you have the right certificate ready to provide to the vendor at the right time.
What if you're buying at auction?
Normally, buying at auction entails making some payment on the day and signing an agreement to pay the bid price. So if you're intending to bid, you should contact the vendor or auction house before the auction to see whether they'll accept a certificate in advance, or alternatively, how this would be handled on the day itself.
Most commercial property vendors, especially the larger breweries, are familiar with the certificates and will normally have a procedure set up to deal with such situations.
The key with any tax issue is to make sure you're prepared well in advance so that you’re not taken by surprise if the subject of VAT arises. So if you're tempted by the idea of buying a pub or other commercial property to convert to a dwelling, whether for yourself or to sell, make sure that you prepare in advance by checking up on the VAT rules and making sure that your solicitor and agent are familiar with the rules.
What about VAT on the conversion costs?
The other major VAT issue is the VAT cost of converting any such property.
Most construction work on existing buildings is liable to VAT at 20%.
However certain conversion work is liable to VAT at the reduced rate of 5% where it relates to the first time conversion into a dwelling or a change to the number of dwellings in a property. The information relating to this subject is included in HMRC’s somewhat lengthy VAT Notice 708: Buildings and Construction, section 7 found here .
The VAT liability of construction work is very complex and there are many different rules to consider. For example, while certain services may be eligible for the reduced rate, goods and materials supplied in connection with those services might not qualify for the reduced rate.
Also, if you purchase goods separately, and engage a contractor to install those goods, you have to pay 20% VAT on the purchase of the goods, even if the services of installation are liable to the 5% rate.
So it’s important to read the VAT liability rules to make sure that you're taking full advantage of the reduced rate of VAT. The rules are quite complicated and a number of different conditions have to be fulfilled before any of the conversion work will qualify for the reduced rate.
Many building contractors are experienced at dealing with the VAT rules and will be able to work with you to identify those parts of the conversion work that are eligible for the reduced rate.
If the contractor charges at the lower rate for work that HMRC think is liable to the standard rate, the contractor is ultimately liable to pay the difference to HMRC, not the customer.
What if I don’t get planning permission for conversion to dwellings or have to let the property before I move in?
As mentioned earlier, the VAT issues relating to property are complicated and it’s not possible to cover every situation here. Each scenario raises its own issues and has to be considered in the context of the business use of the property. In these situations, I’d strongly recommend you take proper VAT advice, preferably well in before purchasing the property.
Is there a way to claim VAT on the costs of conversion from HMRC?
In certain very limited circumstances, it is possible to arrange the property transactions so that you can recover the VAT on the conversion costs.
However, this involves selling the property after its conversion to a separate legal entity, for example a limited company and therefore treating the project as a business for VAT purposes.
It sounds like a good idea. Before you get carried away by the possibility of claiming back the VAT on the conversion costs, you should consider other issues that apply to businesses. These include the costs of setting up a business, whether a limited company or partnership, the costs of preparing and submitting accounts and tax returns for that business and, of course, any tax the business might have to pay on its profit.
You can easily see how the potential VAT benefit could be wiped out. In the event that you incur massive amounts of VAT on your conversion, or if you want to convert commercial properties into dwellings as a business activity, it's certainly worth considering this option. But I definitely recommend taking proper professional advice from an accountant about the other tax and accounting issues that would be involved and preferably before you have purchased the property in the first place.
Saturday 11 February 2012
Friday 10 February 2012
Claiming bad debt relief
If your customer doesn't pay up, you can claim the unpaid VAT from HMRC as bad debt relief (BDR) . What must you get right to ensure you get maximum relief?
When can you claim? You can claim BDR for VAT you have charged your customers if it remains unpaid six months after the due date. You must make the claim within 4 1/2 years of issuing the invoice.
How do you claim? You will need to keep a "bad debts" account within your book-keeping system. You make the claim by adding the refund to the input tax claimed in Box 4 of the VAT return.
You do not reduce the output tax due in Box 1.
Tip Although the debt has been written off in the BDR account, this is only for VAT purposes. You can still continue to pursue the debt in full.
How much can you claim? You can claim the output tax originally charged. It's irrelevant if the VAT rate has subsequently changed. Similarly, you pay VAT at the original rate, not the rate applicable when payment is received.
If your customer has made payments on account, you can only claim for the VAT included in the outstanding balance.
The amount of bad debt relief is normally the VAT fraction of the outstanding amount. However, the Upper Tribunal has held that in very limited circumstances relief may be given for the entire unpaid sum.
The appellant was a firm of solicitors. It supplied services in connection with insurance claims. In compliance with an agreement between HMRC and the insurance industry, it issued VAT-only invoices to VAT-registered insured parties (the main charge being invoiced to the insurer). The Upper Tribunal decided that any amount of such VAT-only invoices which remained unpaid after six months was available in full for bad debt relief. (Simpson and Marwick v HMRC [2011] UKUT 498 (TCC)) - viewable here .
When can you claim? You can claim BDR for VAT you have charged your customers if it remains unpaid six months after the due date. You must make the claim within 4 1/2 years of issuing the invoice.
How do you claim? You will need to keep a "bad debts" account within your book-keeping system. You make the claim by adding the refund to the input tax claimed in Box 4 of the VAT return.
You do not reduce the output tax due in Box 1.
Tip Although the debt has been written off in the BDR account, this is only for VAT purposes. You can still continue to pursue the debt in full.
How much can you claim? You can claim the output tax originally charged. It's irrelevant if the VAT rate has subsequently changed. Similarly, you pay VAT at the original rate, not the rate applicable when payment is received.
If your customer has made payments on account, you can only claim for the VAT included in the outstanding balance.
The amount of bad debt relief is normally the VAT fraction of the outstanding amount. However, the Upper Tribunal has held that in very limited circumstances relief may be given for the entire unpaid sum.
Tuesday 7 February 2012
Changes to EU sales list reporting
Your VAT return has to include figures for EU purchases and sales. You may also have to Provide EC sales lists or Intrastat reports. When do these apply? How are they changing?
EU VAT statistics Vat returns provide important statistics regarding European trade as well telling HMRC how much VAT you owe. If you buy or sell goods to or from a EU country, the value of these transactions has to be entered in boxes 8 and 9 of the return. What happens next?
EC sales list and Intrastat If HMRC find entries in either box 8 or 9 HMRC will send you an EC sales list form. Unless the value of your EC trade falls below certain limits, you must provide details of the transactions for goods and services on the form.
European Sales Lists If your business only makes a low level of supply of goods to VAT-registered customers in another EU country you don’t usually need to fill in the full European Sales List (ESL). Instead there’s a simplified version which you can apply to HMRC to use where:
EU VAT statistics Vat returns provide important statistics regarding European trade as well telling HMRC how much VAT you owe. If you buy or sell goods to or from a EU country, the value of these transactions has to be entered in boxes 8 and 9 of the return. What happens next?
EC sales list and Intrastat If HMRC find entries in either box 8 or 9 HMRC will send you an EC sales list form. Unless the value of your EC trade falls below certain limits, you must provide details of the transactions for goods and services on the form.
European Sales Lists If your business only makes a low level of supply of goods to VAT-registered customers in another EU country you don’t usually need to fill in the full European Sales List (ESL). Instead there’s a simplified version which you can apply to HMRC to use where:
- the value of your total taxable turnover in a year isn’t more than the VAT registration threshold plus £25,500.
- your supplies to customers in other EU countries aren’t more than £11,000 a year.
- your sales don’t include New Means of Transport (see here for what counts as a new means of transport).
If HMRC
agrees that you can use the simplified ESL it means that you:
- never need to fill in the actual value of your supplies to each customer - instead you enter a nominal value of £1
- only have to complete the form once a year - you agree with HMRC when you’re going to send it in.
However, if the value of EU goods including shipping costs (but not services) bought or sold exceeds:
- £600,000 for purchases, HMRC call these arrivals; and
- £250,000 for sales, also called despatches,
This is known as Intrastat (more details can be found here .)
Awkward thresholds Intrastat has its own method of calculating thresholds. They are set for a calendar year. So, for example, if if your EU sales or purchases exceed the corresponding limit for the first time in November 2012, you will have to make an Intrastat declarations for November, for the rest of 2012 and the whole of 2013. However, if your EU turnover in 2013 is less tjan the thresholds Intrastat will not apply to 2014 unles, or until, the month in which either threshold is breached.
TRAP HMRC takes Intrastat very seriously. Errors in the reports or failure to render them can be a criminal offence carrying a maximum fine of £2,500 each although HMRC only impose this level of fine in extreme cases of multiple failure. The more usual level of fine is £250.
Intrastat changes HMRC have recently updated their guidance on Intrastat - Notice 60 (the latest version can be found here ).
It includes details of two important changes:
TIP You don't have to use HMRC's forms for the reports. HMRC will accept CSV reports, which most computerised accounting systems can generate. This can save a lot of time.
Awkward thresholds Intrastat has its own method of calculating thresholds. They are set for a calendar year. So, for example, if if your EU sales or purchases exceed the corresponding limit for the first time in November 2012, you will have to make an Intrastat declarations for November, for the rest of 2012 and the whole of 2013. However, if your EU turnover in 2013 is less tjan the thresholds Intrastat will not apply to 2014 unles, or until, the month in which either threshold is breached.
TRAP HMRC takes Intrastat very seriously. Errors in the reports or failure to render them can be a criminal offence carrying a maximum fine of £2,500 each although HMRC only impose this level of fine in extreme cases of multiple failure. The more usual level of fine is £250.
Intrastat changes HMRC have recently updated their guidance on Intrastat - Notice 60 (the latest version can be found here ).
It includes details of two important changes:
- From April 2012 all Intrastat reports must be submitted online. Paper version will no longer be accepted.
TIP You don't have to use HMRC's forms for the reports. HMRC will accept CSV reports, which most computerised accounting systems can generate. This can save a lot of time.
A comma-separated values (CSV)
file stores data (numbers and text) in plain-text form.
Many
accounting
and
bookkeeping
programs
allow
data
stored
to
be
“exported”
to
a
spreadsheet
program,
such
as
Excel,
in
CSV
format
so
that
it
can
be
viewed
by
others
who
don’t
have
the
same
accounting
software
as
you.
HMRC will accept Intrastat data
in CSV file format. For details of the data required in CSV format
visit:
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