VAT and Property Conversions

November 7th, 2011 by Mark Withers

Subject to a number of preconditions being satisfied, VAT incurred in connection with turning a property into a residential dwelling are refundable by HMRC.

One of the key preconditions to availability of a refund is that the building must be meant for separate use or disposal as a dwelling.

In the recent case of Gerard Silver -v- HMRC the First Tier VAT Tribunal ruled that a planning condition which restricted the use of the barn (which was being converted) to ‘ancillary residential accommodation to the adjacent farm’ meant that the necessary precondition as to separate use was incapable of being satisfied and a refund of VAT wasn’t therefore available.

This decision is consistent with that of the Upper Tribunal handed down in HMRC -v- Lunn.  In Lunn, the construction of a dwelling within the curtilage of a building pursuant to a consent which allowed the property to be used only for ‘incidental or ancillary residential uses’ meant that the condition that the property must be intended to be used as a ‘separate house’ couldn’t be satisfied (and the zero rating which would ordinarily be available in connection with the construction of a new build or residential dwelling wasn’t available).

These cases illustrate the importance of considering the VAT implications of any development at an early stage to avoid a nasty surprise when efforts are made to reclaim or obtain a refund of any VAT.

If you wish to discuss any issues raised in this blog please contact Mark Withers at mark.withers@parissmith.co.uk

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VAT and service charges – an unexpected windfall?

October 12th, 2010 by Mark Withers

Unless a landlord has opted to tax for VAT (or one of a handful of exceptions apply) VAT isn’t charged on rent.  HM Revenue & Customs (HMRC) have consistently taken the view that where service charge is payable in respect of part or whole of a property which is exempt for VAT, the service charge wont be VATable. 

In the absence of an option to tax, VAT incurred by the Landlord in the provision of services will invariably be passed on to the tenant as part of the service charge (because the Landlord wont be able to reclaim it).  Without a  VAT invoice (which the tenant wont have received since the landlord wont, as things stand, be deemed to be making a taxable supply) the tenant wont be able to recover any VAT which forms part of the service charge.

The decision of the European Court of Justice in the Tellmer case has given rise to an argument that the provision of services by a landlord may amount to a taxable supply even in the absence of an option to tax for VAT.  The implications of this argument are that tenants of properties who don’t currently pay VAT on rent can nonetheless reclaim any VAT paid as part of their service charge.

Claims can be backdated for up to four years. On the basis of HMRCs current position it seems likely that any attempt to reclaim VAT will, in the first instance, be rejected.  There is however a fairly clear procedure for submitting an appeal and a number of cases are currently in this system.

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Housing Associations, Headaches and VAT

August 31st, 2010 by Mark Withers

The recent announcements by the Homes and Communities Agency of cuts to the National Affordable Housing Programme (NAHP) being £450 million for the 2010/11 financial year will cause developers involved in agreeing terms for developments reliant upon NAHP funding a fairly major headache. Not least of these headaches will be the VAT implications of developing sites where an option to tax for VAT has been made.

Housing Associations inability to reclaim VAT is often dealt with by the disapplication by the Housing Association of the vendor’s option to tax. The supply of a site following service of the notice is exempt for VAT and this can enable Housing Associations to develop sites which would otherwise be unviable.

Where Housing Associations are unable to commit to purchase owing to the reduction in the NAHP funding or uncertainty over its availability, a developer who has been endeavouring to facilitate the disposal and development of a site on which VAT is payable is left in a difficult position. The developer may choose to purchase the site itself, reclaim any VAT and develop to “Golden Brick”. At this point the sale of the site to a Housing Association (once any funding issues have been resolved) will be deemed, for VAT purposes, to be the disposal of a dwelling or dwellings upon which VAT is not payable (or on which more accurately VAT is payable but at the rate of zero).

In this situation the developer will be incentivised to build as quickly as possible but also to persuade the Housing Association to accept the recent guidance issued by HM Revenue and Customs, that Golden Brick isn’t simply necessarily two bricks above the damp proof course (being the definition traditionally used) but rather the point at which construction of the building has progressed beyond the foundation stage. With a large building or development this might bring the completion date forward significantly and so improve the developer’s cash flow.

Getting the definition of “Golden Brick” right and considering the other options available to navigate a route through the obstacles which VAT can present when developing in conjunction with Housing Associations is and will for the foreseeable future, remain a key issue for any developers active in this field.

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