Everything You Need to Know on VAT With Property Income
What is VAT?
Value Added Tax (VAT) is an indirect tax that is paid on goods and services. When you become VAT Registered you charge VAT on your sales and can reclaim VAT on your purchases that have VAT attached. The net VAT of your sales minus your expenses is what is payable by HMRC or reclaimable from HMRC.
What is the rate of VAT?
Within the UK the standard rate of VAT is 20%, this is charged on items such as fuel, furniture and most goods and services. The other VAT rates are; the Zero-rate (0%), and the Reduced Rate (5%). The reduced rate applies to some goods and services for example home energy. Zero rated goods and services can consist of children’s clothes and most food. If you sell exempt services or goods you cannot reclaim back the VAT you have paid.
VAT on residential lettings
Most landlords and property investors fall within this category, this includes activities such as residential buy-to-let, HMO lettings, and rent to rent HMO. This business activity is exempt for VAT purposes, this means that you cannot usually register for VAT, would not need to charge VAT, and cannot reclaim it.
VAT on serviced accommodation
Serviced accommodation is seen as holiday accommodation, therefore the supply of this service is standard rated at 20% VAT. The VAT threshold is £85,000. If your annual sales are below this threshold you do not need to register for VAT. You will need to register for VAT once you have exceeded the threshold or you expect your sales will exceed this threshold in any 12-month period. There are schemes available such as the Flat Rate Scheme and the Tour Operators Margin Scheme (TOMS). This is a highly specialist area and requires consultation from a chartered tax advisor.
VAT on commercial to residential conversion
When converting non-residential property to residential property there is VAT relief. This conversion is zero-rated meaning you can claim back the VAT on the construction work involved for the conversion. An example would be converting a factory to residential flats. If you are intending to keep the properties to let out once finished it might be possible for your main contractor to apply a reduced 5% rate. This requires detailed planning and if you fall within this category, we would recommend professional advice.
VAT on an HMO conversion
Where a single occupancy residence is converted to a multiple occupancy residence this can qualify for the 5% reduced rate VAT. An example of this would be converting a 4-bed house to an HMO. You must have the relevant planning consent and building control for the works for the relief to apply.
VAT on commercial property
Newly built or uncompleted commercial property sales are standard rated at 20%. For example, if you were to sell an office building for £300,000 including VAT, there would be £50,000 of VAT included within this price. The lease of commercial property or commercial buildings older than 3 years are not taxable and are therefore exempt for VAT purposes, unless an option to tax has been made in respect of the property. The benefit of this election is that landlords can claim the VAT on the purchases they have made. For example, repairs and maintenance or the utilities they have paid. This election is on a building-by-building basis.
VAT on residential development
If you are providing new residential developments this is zero-rated. This means that you can still claim back the VAT on your purchases for the development. For example, if you had paid £600,000 inclusive of VAT for development work, you would be able to reclaim back £100,000 in VAT. You need to be eligible to qualify for this relief, there are certain traps which might result in the VAT not being reclaimed, for instance where you plan to let the property out following completion.