8th April 2014
We continue to advise our property development clients on the VAT implications of the conversion of commercial premises to either residential or mixed use. The properties tend to be former pubs, but also, following the change in 2013 to the General Permitted Development Order 1995 (relaxing some planning requirements), offices changing to residential use.
The VAT treatment of the property purchase, conversion costs and future income stream has a major impact on the financing and profitability of projects which can often be small scale, fast turnaround projects where margins are tight.
Recent examples include:
• A pub with pre-existing residential accommodation (manager’s flat) converted to residential properties with the question of the availability of the VAT zero-rate for the sale of the new properties.
• Funding of the VAT on the purchase of a commercial property – as the intention was to convert to residential use, we assisted with the commercial negotiations between the vendor and the purchaser to disapply the option to tax. This meant the buyer did not need to fund the VAT on the purchase which helped with their arrangements with the bank. It also resulted in a bottom line SDLT saving for the purchaser.
• Minimising the VAT charged on conversion costs by agreeing appropriate VAT rates with the contractor. This resulted in a significant working capital saving.
Each project is different in terms of the bottom line and working capital VAT impact and we would recommend that VAT is considered at the outset of any project to ensure that VAT cost is managed and minimised, or where there is a VAT cost, it is built into the budget and funding requirements.