Andrew Needham looks at the VAT consequences of taking a property into private use.
It is not uncommon for a business to construct a residential property and then, some way through the project, decide to change its use from business and divert it to private use. In other words, at some point in the project, the business owner thinks the house looks so nice they want to live in it themself!
Types of development
There are different situations where this could happen and each has a different VAT consequence. Examples include:
- building a new residential property;
- renovating an existing residential property; or
-
converting a commercial property into residential use.
The VAT consequences can also vary with the legal entity undertaking the development, for example, a sole proprietor, partnership or a limited company.
New build
The sale of new residential property is a zero-rated taxable supply, so if a business builds the property in a limited company and the director decides they want to live in it, they can continue to put the construction costs through the company and reclaim the VAT. At the end of the project, the transfer to the director would be treated as a zero-rated taxable supply, and there would be no clawback in the VAT that was reclaimed in the limited company. The same would apply where one partner in a partnership decided to ‘buy’ the house.
However, if it was a sole proprietor or, for example, a husband and wife partnership that decided to occupy the house during or after the construction, there can be no zero-rated sale as they can not ‘sell’ it to themselves as the same legal entity.
Tip. If this happens part way through a project, the sole proprietor would be entitled to use the DIY Housebuilders Refund Scheme to claim back the VAT on the materials that are purchased.
VAT incurred on eligible goods and services purchased after the change of intention can be recovered through the scheme in the normal way.
Trap. The change of intention may result in a VAT-registered trader being liable to account for VAT on deemed supplies in respect of those transactions where VAT had already been claimed as input tax by the VAT-registered trader.
Up to 1 January 2011, a sole proprietor could treat the onward supply as a business supply of construction services and materials and the supply could be zero-rated or reduced-rated as appropriate. After that date, however, this option is no longer available and VAT can only be recovered to the extent that the services and materials will be used for taxable business purposes.
Renovations
The onward supply of a renovated residential property is an exempt supply, so a business could not claim back the VAT on the renovation costs anyway. If the individual decided to live in it, the situation would not change and they would not be able to use the DIY Housebuilders Scheme, so no VAT would be recoverable.
Conversion
If a business were converting commercial premises into residential use, for example, a barn conversion, it could be treated in the same way as a new build. A limited company could sell the property to the business owner as a zero-rated taxable supply, and there would be no clawback of any VAT reclaimed but if it was a sole proprietor (or all the partners in a partnership), any VAT incurred after the change to private use could be claimed under the DIY Housebuilders Scheme.
Practical tip
If a business decides to move into a house that it has built or converted, it may still be able to recover the VAT on the materials purchased by using the DIY Housebuilders Scheme.
