Are you a residential property developer? Why not consider voluntarily registering for VAT to benefit from the little known 5% reduced rate.
April 2011 marks the 10th anniversary of the introduction of the 5% reduced rate of VAT for certain types of building works relating to residential property. The 5% rate was brought in as part of the ‘Urban Regeneration Scheme’, which encouraged redevelopment of brownfield sites rather developing Green Belt land.
The use of the 5% rate has proved very beneficial to property investors, whether working on a ‘buy-to-sell’ or ‘buy-to-let’ basis. Given the anniversary, we thought it might be useful to give a quick reminder of how the relief works.
The Reliefs
There are two types of relief as follows:
1. Renovation of Empty Dwellings
Under this provision, where an existing residential property is renovated after being empty for at least two years, the renovation building services can be supplied to the property owner at the 5% rate. In the 2001 introduction, properties had to be empty for at least three years previously, but this was reduced to two years from 1 January 2008 to stimulate greater use of the relief.
2. ‘Change in Number of Dwellings’ Conversion
This applies where the number of dwellings in the property after the conversion changes from the number of dwellings before the conversion. The use of the word ‘change’ means the number of dwellings can increase or decrease, and includes changes from zero dwellings to one or more. This means the conversion of a non-residential building into residential property (e.g. converting a restaurant into a house, or a warehouse, into apartments) is eligible for relief.
The Practical Benefits - Renovations
Buy-to-let.- The letting of residential property is VAT exempt, so VAT incurred on the cost of renovating the property is usually non-recoverable (unless the property owner is VAT registered, and can use certain ‘de minimis limits’ to reclaim the exempt VAT – which we won’t go into here). Quite simply, by having the builder charge 5% rate on the renovation services, the property owner reduces his non-recoverable VAT by 12.5%.
Buy-to-sell - Like the letting of residential property, the sale of an existing dwelling is also VAT exempt, so the same 12.5% saving on renovation services is available to buy-to-sell investors. Additionally, a little-known VAT incentive also introduced in 2001 allows for existing residential properties which have been empty ten years or more, to be treated as non-residential, meaning that the onward sale after renovation can be zero-rated instead of exempt. This allows the property owner to voluntarily register for VAT, and recover the 5% VAT incurred on the renovation costs (as well as any other VAT costs).
Conversions
Buy-to-let - As an example, if a developer buys a large house and converts it into flats for letting (and vice versa), the builder can charge the owner 5% VAT on the conversion services. As the lettings are exempt, the 5% VAT is non-recoverable, but gives a 12.5% saving similar to renovations.
Buy-to-sell - Using the above ‘house-into-flats’ example, the onward sales of the flats are also exempt, but there is again the saving of reducing non-recoverable VAT by 12.5%. Also, similar to the 2001 relief for the sale of existing residential properties empty 10 years or more, the sale of a new dwelling after conversion from a non-residential can be zero-rated providing there has been no residential use for at least 10 years. This again allows the property owner to voluntarily register for VAT and reclaim the 5% VAT incurred on the conversion services.
Practical Tip
Voluntarily registering for VAT can have a beneficial impact on residential property developers.
By Steve Allen
