My client runs a business that purchases old houses, renovates them up to modern standards and then sells them on. He uses a preferred architect for the design work and various building contractors to do the renovation work. Can he recover the VAT that the architect and various contractors charge to him as he is selling, rather than renting, the houses once the work is complete?
Let us first consider what VAT will be charged for the work undertaken:
- the architect’s fees will all carry standard rated VAT;
- if the house has been empty for less than two years the building work will be standard-rated;
- if the house has been empty for more than two years, meets the conditions for qualifying residential premises, and the services are qualifying services all as set out in section 8 of VAT Notice 708, then the building work will be at the reduced rate of 5%;
- the supply and installation of goods that are not building materials will be standard-rated even if the rest of the renovation qualifies for the reduced rate, and
- Any materials that your client buys without installation services will be standard rated.
Having established the VAT your client will be incurring we can move on to consider the VAT position on the sale of the renovated properties and the impact on the recovery of input tax.
The sale of a residential property that has been lived in at any time during the 10 years immediately before the sale will be an exempt supply. Consequently, input tax incurred on the costs of renovation and costs of sale will not be recoverable unless the business is also making taxable supplies and the input tax is de minimis under the partial exemption rules. Notice 706: Partial Exemption sets out the de minimis rules in section 11.
If, on the other hand, the residential property has not been lived in during the 10 years immediately before being sold then the sale will be zero-rated as the first grant of a major interest in a newly converted dwelling. The input tax incurred on the renovation and selling costs can therefore generally be recovered. I use the word ‘generally’ because as with other residential developments, input tax is not recoverable on goods incorporated in the building that are not ‘building materials’. In brief, this input tax block applies to gas and electrical appliances, carpets and furniture fitted into rooms other than the kitchen. More detailed guidance on building materials can be found in sections 12 and 13 of Notice 708 and section 5.3 sets out the conditions for zero-rating the sale of a property empty for more than 10 years.