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Tax – VAT
 

L&T – the basics

A summary of the basic rules on VAT and commercial property:

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Conveyancing searches – disbursements?

Should electronic property searches be treated as disbursements for VAT purposes? Alternatively, are they part of the legal service provided, and so subject to VAT?

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Compensation – or supplying a service?

There is no VAT due on compensation payments (eg an agreed dilapidations liability). But, in every situation you have to look at the nature of the payment – if it is genuinely compensatory then there will be no VAT, whereas if the recipient does something in return, then there is likely to be a VAT ‘supply’.  

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Development – zero-rating

A developer who acquires a bare or existing commercial site for redevelopment will have to pay VAT up-front. Often, the seller will have exercised an option to tax so VAT of 20% will be payable. While this will usually be recoverable, SDLT is charged on the VAT-inclusive price, and so paying VAT can lead to a higher SDLT charge.

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Residential – zero-rating

A property conversion can be zero-rated if it involves the conversion of a building from non-residential to residential. But, there has been much litigation on exactly how this provision works, and we now have important guidance from the UT.

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DIY builder – ‘dwelling’

The DIY builder scheme allows the refunding of VAT if the building is ‘designed as a dwelling’.

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Dwelling – more than one building

HMRC has changed its policy on VAT treatment of dwellings created from more than one building.

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Conversion – residential

Conversion of non-residential space into residential space can be zero-rated (thus allowing the developer to reclaim VAT on expenditure, but not have to charge VAT on sale). Zero-rating applies to the first grant of a freehold or leasehold (over 21 years) interest on the conversion of a non-residential building or a non-residential part of a building into a dwelling or a number of dwellings. Two points to note:
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Conversion – ‘non-residential’

The conversion of a ‘non-residential part of a building’ into residential use may well attract zero rating. But, there are conflicting decisions.
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