Recovering VAT From Residential Property Refurbishments
In most cases, VAT incurred on the refurbishment of residential property is not recoverable. However, there are some instances where it may be possible to reclaim some of the VAT. In this article, we will look at residential properties that are purchased, renovated and then either let out or sold.
Generally, property costs for maintaining, repairing, and upgrading a residential property are wholly attributable to a future supply which is exempt from VAT as the property will either be let or sold. As the future supply is exempt, no input tax incurred in relation to that exempt supply can be recovered.
The partial exemption lifeline
However, for businesses that make both taxable and non-taxable supplies, know as partially exempt businesses, it is possible to recover some or all of this input VAT. Under the VAT partial exemption rules, there is a de minimis limit that, if not exceeded means the exempt input tax can be reclaimed in full. The limit, which applies annually, is less than £7,500 of exempt input tax and below 50% of total input tax. Once this limit is exceeded, none of the exempt input tax is recoverable.
For example, if a trading business that is VAT registered and pays VAT on its supplies were to purchase a residential property, renovate it and subsequently rent it out, it could potentially recover the VAT incurred on the refurb if the partial exemption rules are met.
The first rule relating to the first £7,500 of exempt input tax means that as long as the company spends less than £45,000 including VAT (the VAT being less than £7,500) in a year, it can potentially recover all the VAT, subject to the second rule being met.
The second rule states that the company’s total input VAT relating to its vatable trading business for the year must be more than 50% of the total input tax. So, if the VAT on the example refurb was £6,000, provided the input VAT incurred by the business relating to its vatable trading business was more than £6,000 then the second rule is passed on the basis that the input tax on the exempt refurb is below 50% of the total input tax incurred by the business.
As the partial exemption position is crystallised each year, residential property improvement projects which span two years may be able to achieve full VAT recovery over both years if the costs are spread. This could potentially increase the VAT recovery on a refurb project from £7,500 to £15,000 – the equivalent of a £90,000 refurb project. Depending on the cost of a project, it may make sense to time the project across the two years. This should not be manipulated however, and contractors should still charge VAT at the appropriate time for works carried out.
With the cost of construction increasing, these increases are being passed on to the customer via higher refurb quotes. The ability to potentially reduce the cost of the project by 20% by using this VAT saving could make projects more viable. As with any investments, you should consider more than just the VAT advantage that could be achieved.
Alternatively, if you have any other questions regarding Residential Property Refurbishments projects, please email our EQ Property & Construction team at [email protected].