Recovering £60,000 VAT for Property Developer 

The VAT People assisted a client in recovering £60,000 of VAT paid on the purchase of a building for letting purposes. Our client is a property developer that purchased a former public house that had not been occupied for a number of years for £300,000 plus VAT of £60,000. The client intended to convert the property into apartments and had assumed that the VAT would be fully recoverable on the basis that his business had opted to tax the property and would be leasing the property to a social landlord for a few years.

Unfortunately for the client, an option to tax does not apply to dwellings. VAT can only be reclaimed where the dwelling is used to make a zero-rated first grant of a major interest in the property. It cannot be reclaimed when the property is used for VAT-exempt purposes.

In this case, the planned lease to the social landlord did not qualify as a zero-rated major interest and would have been exempt from VAT. This meant the client could not recover VAT on the purchase price of the pub relating to the ground floor or on the costs of the conversion work.

The upper floor was already a dwelling and could only be used for exempt purposes. This also blocked VAT recovery on the proportion of the purchase price and renovation services connected to that part of the property.

We assisted the client in changing the intended use of the building by extending the lease terms to the social landlord and including a break clause. This created a zero-rated supply, enabling full VAT recovery on the purchase price and the conversion costs for the ground floor of the property.

We also advised the client to pursue a refund of VAT charged in error on the portion of the purchase price relating to the landlord’s accommodation, as the vendor’s option to tax did not apply to that part of the property. Additionally, had the client sought advice before the purchase, we could have helped prevent the vendor’s option to tax from applying to any part of the sale, which would have provided a substantial cash flow benefit.

If you or your clients are involved in the construction or conversion of property, it is always advisable to seek specialist VAT advice. The VAT People regularly identify opportunities to secure considerable VAT savings that would otherwise be overlooked. For assistance, please call our free helpline on 0161 477 6600.