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What type of VAT relief will apply to your office to residential conversion?

What type of VAT relief will apply to your office to residential conversion?

Mike Wakeford

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The COVID-19 pandemic forced the country to work from home, and while many have gone back to offices, there are multiple businesses deciding to either work from home or use shared workspaces. This has meant the abandonment of office spaces across the UK. These empty office spaces are being turned into other buildings, which will often in turn change the property’s class and the VAT that should be applied.

These increasing amount of opportunities for permitted development for conversions of commercial property to residential property have had their popularity skyrocketed potentially due to UK housing being in high demand. However, there is also an argument about whether these conversions are a good idea, as they do not provide enough affordable homes.

Office-to-residential conversions are made possible through permitted development rights, which allow developers to bypass the usual planning process when converting certain types of buildings. The latest permitted development rights (PDR) rules have placed new restrictions on how developers can go about redeveloping offices into residential properties. One of the bigger changes is the three-month vacancy period prior to the date of application, this will have income and empty rates tax considerations that will add complications when planning ahead.

Depending on the type of development, VAT can be charged at 0%, 5% or 20% on construction costs, therefore it is important to ensure VAT is charged at the correct rate. For the construction work to be charged at 0% or 5%, the work must be done in accordance with planning consent, as HMRC inspectors will routinely review planning portals. If planning rules are overlooked, this will result in the wrong VAT rate being charged, paid and recovered, and to potential interest and penalty charges arising on unpaid VAT as a result.

Should a developer not have all of their planning consent paperwork in order before starting the work, they can apply for retrospective planning documents. However if this is done, any work that is carried out before the date on which formal planning permission is granted will be subject to VAT at 20%. This is because the only documents that matter, when considering the VAT treatment of construction work, are those in existence when the work is done.

Before starting any project, there are some initial areas you should identify, including if your development project is eligible for VAT relief, how much refurbishing the space will cost, and whether the space is under the permitted maximum square foot allowance.

Our expert real estate and construction tax advisers will be able to help you with identifying and claiming VAT relief, constructing a cash flow forecast for current and future projects and act as a trusted business advisor throughout the process.

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