Conversion of Commercial Buildings for example Office Buildings, Shops, Warehouses, Barns into Residential qualify for 5% reduced rate VAT in relation to the Conversion Costs. But when the first major interest is granted it will be Zero Rated giving full VAT recovery.
Note that Building Materials supplied separately to the contract for the conversion will be charged at 20% standard rate but you will recover that VAT.
The most common approach is to create a group with the subsidiary carrying out the conversion work and granting the first major interest, either by directly selling the first major interest or transferring the completed residential property as first major interest to the holding company
A Group will qualify for Group SDLT Relief (subject to conditions).
This means that full recovery of VAT has been achieved and no SDLT suffered, however, the converted property will be transferred at Market Value which could create a profit in the developing subsidiary.
If this isn’t done and the subsidiary rents out the property partial exemption may apply reducing the VAT recovery or limiting it.
Below are the key sections relating to VAT.
VAT Notice 708 Section 5.3 Non-residential conversion
A ‘non-residential conversion’ takes place in 2 situations. The first is when the building (or part) being converted has never been used as a dwelling or number of dwellings (see paragraph 5.3.1) for a ‘relevant residential purpose’ (see paragraph 14.6), and it is converted into a building ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose (see paragraph 14.6).
The second situation requires that in the 10 years immediately before (see paragraph 5.3.2) the sale or long lease, the building (or part) has not been used as a dwelling or number of dwellings or for a ‘relevant residential purpose’ and it is converted into a building either ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose’ (see paragraph 14.6).
Examples of a ‘non-residential conversion’ into a building ‘designed as a dwelling or number of dwellings’ include the conversion of:
- a commercial building (such as an office, warehouse, shop)
- an agricultural building (such as a barn)
- a redundant school or church
VAT Notice 708 Section 7 Reduced rating the conversion of premises to a different residential use
A qualifying conversion includes the conversion of:
- a property that has never been lived in, such as an office block or a barn
But Zero Rating (0%) applies on the first grant of a major interest where a developer has converted a non-residential building into a home.
VAT Notice 708 Section 5.6 First Grant of a Major Interest
If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT
VAT Notice 708 Section 4.2 Granting a major interest in a building
You’re granting a major interest in a building when you sell, assign or surrender:
- the freehold
- in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
- in relation to Scotland, the estate or interest of the owner
- in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years