Uncovering VAT Savings: Reclaiming Tax Benefits for Converting Commercial Spaces into Residences
Reclaiming VAT Back in 2001, the inception of a revolutionary initiative known as the Urban Regeneration Scheme, later expanded in 2002, introduced a groundbreaking opportunity that, while often flying under the radar, remains a well-guarded secret cherished by landlords, builders, and developers. Surprisingly, many landlords engaged in property renovations unwittingly find themselves paying the standard 20% VAT rate, thereby missing out on the potential to reclaim a significant 15% of their refurbishment costs.
Grasping the Scheme
Originally coined as the Urban Regeneration Scheme, this VAT scheme casts a much broader net than its name implies. It is not confined to specific geographical areas but rather extends its reach to encompass all eligible buildings. Its primary objective is to grant a discounted VAT rate of 5% for the enhancement of existing housing stock. This reduced rate can be reclaimed in various contexts:
1. Reclaiming VAT: Converting Non-Residential to Residential
This encompasses the transformation of non-residential structures, such as barns or warehouses, into residential properties.
2. Reclaiming VAT: Altering the Number of Dwellings
When you modify the number of “single household dwellings” within a property, whether by converting a grand old house into two flats or reconfiguring flats or a house into bed-sits.
3. Reclaiming VAT: Reviving Long-Vacant Properties
If you’re breathing new life into a residential property that has sat vacant for three years or longer.
4. Reclaiming VAT: Converting for a ‘Relevant Residential Purpose’
This category encompasses conversions for purposes like children’s or old people’s homes, though it necessitates obtaining a certificate from the developer to secure the coveted lower VAT rate.
Navigating the Nuances
However, it’s crucial to navigate some intricacies. For instance, when refurbishing a multi-story building and altering the number of flats on specific floors but not others, the VAT reclamation at the reduced 5% rate will only apply to specific parts of the building. Consider these scenarios:
If a three-story building initially has two flats on each floor and you decide to convert the top floor from 2 flats into 1, you are eligible to reclaim VAT at the reduced 5% rate.
The first-floor flats, if they undergo a refurbishment with no changes to the number of flats, won’t qualify for the reclaimed VAT rate.
However, if you decide to convert the ground floor from 2 flats into 3, you can reclaim VAT at the reduced 5% rate for the work done.
Crucial Exceptions to Keep in Mind
It’s vital to recognize that the scheme applies exclusively to properties that can be individually sold, allowing for separate disposal of each house or flat, even if you intend to rent them out. Consequently, it won’t be applicable to the construction of extensions or “granny flats.” Furthermore, the reduced 5% rate pertains solely to the builder’s services, as materials are still subject to the standard 20% VAT rate.
For in-depth insights, we encourage you to consult VAT Notice 708 or visit the HMRC website, which offers a wealth of pertinent resources. Sharing this valuable information with your builder is essential to ensure that you reclaim VAT, maximizing your savings. These savings can be substantial, even on smaller projects, potentially accumulating to hundreds of pounds.
