Value-added tax is a relatively new type of tax in the UK. The tax was first introduced in 1973 and accounts for about 17% of the government’s total revenue. As a person who deals in the property business, you will collect VAT on sales and pay VAT on purchases. The difference between the VAT collected from the customer and the VAT paid to the supplier is payable to the HMRC of the business.
VAT Rates In The UK
Currently, the standard VAT rate is 20% in the UK. However, investors can also only pay zero-rate or a 5% reduced rate of VAT in some cases.
Typically, if a supply is VATable, you can request a refund of the VAT paid to the suppliers. However, if that supply is exempt, you will not be able to claim back the paid VAT. Hence, it will benefit you the most if you are only charged a zero-rated VAT.
“Let’s take a look at how property businessmen and investors can save on VAT”
Properties for residential lettings do not have to pay VAT, so most landlords do not have to think about this concern at all. The exemption will apply to all types of residential letting, be it a single-let, a Rent2Rent let, or HMO.
However, serviced accommodations like those offered by Airbnb are not exempted and will have to pay the standard rate.
As we mentioned above, service accommodations are a taxable supply and are levied a 20% surcharge on the total invoiced amount charged to the lodger. However, if the annual sales of the accommodation are less than the VAT registration threshold amount, which is currently £85,000, you are exempted from registering for VAT. However, once your annual sales exceed the amount, you will need to pay the VAT.
If your business is VATable and you haven’t registered it yet, then you will be liable for hefty fines and penalties. Contact our property tax specialists today if you operate a service accommodation business to understand whether VAT applies to you.
Commercial to Residential Conversion
Another way you can get relief from VAT is by converting a commercial property into a residential property. This will make you eligible for zero-rated VAT, which means you can request a refund for the VAT you already paid on the construction work.
Keep in mind, though, that the VAT laws for commercial to residential conversion are quite complex, so it is important to seek the advice of a property tax specialist.
If you have a single residential property like a four-bedroom home and you converted it into two flats, you will be eligible for the reduced VAT rate. That means you only have to pay 5% VAT instead of the standard 20%.
You will also be charged a reduced rate if you convert a single residential property into an HMO.
However, keep in mind that this rule only applies if the conversion results in a change in the number of dwellings. To qualify for the reduced VAT, you will need to get the necessary planning permission and building control approval before you set to work.
If you are selling a newly constructed commercial property like an office with a freehold, you will be charged a 20% VAT. However, the lease of a commercial property or a commercial building that is more than three years old is not taxable unless the investor elects to “opt to tax.”
Whenever there is a supply of commercial buildings or land that is exempted from VAT, the owner can change it to the standard VAT-rated supply by choosing the “option to tax” election. This will be beneficial to the owner since it will allow them to claim the VAT already paid for regular expenses and building work from the HMRC.
This option is available on a property-to-property basis, not on the owner’s whole portfolio.
“Are you thinking of getting into the property business but need to understand more about VAT and other taxes work? Reach out to wesavepropertytax.com our chartered certified accountants and chartered tax advisers today to get expert guidance on property taxes”