Although the VAT laws have been changed, there are some instances in which owners can apply for reduced VAT but it can be difficult to understand where and when these rules apply and, in most cases, owners are completely unaware of it.
One particular owner, David Northcroft, found good fortune by talking to The Listed Property Owners’ Club VAT Advisor Dave Brown at the annual February Listed Property Show; whereby their conversation at the 2017 event has led him to receive a refund of over £17,000 from HMRC.
David had purchased a dilapidated 1413 hall house in Maidstone, Kent, which was a failed pub at the time, and he then converted it to a single domestic dwelling. The owner had managed to work his way through two VAT hurdles, one of which was evading VAT on the purchase price as the purpose was being converted from commercial to residential use and then, with the help of an accountant’s report, he was able to reduce the VAT charges down to 5% on the majority of the reconstruction work rather than the standard rate.
David explains: “My home is a conversion from a pub to a house. The pub was still a commercial property, so if we were commercial, we would have had to have paid 20% VAT on it rather than stamp duty at the various rates. There is a simple procedure to go through with VAT to demonstrate that you are a private buyer, subject to stamp duty when you buy this building, not subject to standard rate VAT at 20%.
“My accountant, that I have been with for 30-odd years, told me about this and said that it is a very simple procedure, like with everything HMRC, it has a form that you fill out. It’s very specific on the timing but we filled out the form and that went through straightforwardly meaning we bought the building; it was just subject to stamp duty like a private house, which a huge amount of money. “When you’re buying a property that is being converted from a commercial use to a private use you have to demonstrate that it’s private and not being bought by another company, in which case it would be subject to the 20%.
“This particular part of the process was very short and the simplest step of the three.
“The next step applies specifically to pubs, but not to all pubs. Typically, a pub is a pub on the ground floor and a tenant on the top floor. The question you must answer is, is upstairs a dwelling? “A dwelling in this instance means self-contained. In our case, the tenants used the pub kitchen downstairs, so it was not self-contained therefore it was not a dwelling. Private dwellings do not pay VAT, so there was not a dwelling here even though people lived here, because it wasn’t self-contained. We had to demonstrate this. We actually produced a report saying that there was not a dwelling here and took photographs of the stairs down to the kitchen. Based on that, I went to all our main contractors and all but one, who were responsible for accurate VAT returns for their own businesses, accepted that they should charge us 5%, the so-called reduced rate, not 20%.
“We were building for just over two years and during that time we were being charged 5% everything we bought, apart from one of our contractors.”
Then David spoke, by chance, to Dave Brown at The Listed Property Show who introduced a third step the owner was not aware of. With Dave’s help and guidance, this restoration project, except from VAT on trivial items and specific disallowed items (such as architectural fees), was completed without incurring VAT, resulting in a refund from HMRC totalling over £17,000.
David explains: “I spoke to Dave Brown at the LPOC at one of their shows and he told me I could get the remaining 5% VAT back. So, I looked at the form but according to the form I couldn’t get the 5% back. The form, 431C, has certain conditions and even mentions converting a pub, as well as other various things in that form that would bar us claiming the 5% back. I said to Dave that the form doesn’t make sense if you already don’t have a dwelling and that justifies the 5%; why doesn’t it justify the remaining part, going down to 0% and Dave explained that he had got a ruling from HMRC on buildings of this type, and offered to send it to me.
“I then filled the form out and I just claimed for the main pieces. I then added Dave’s ruling to my application and a few weeks later a cheque arrived for £17,000. If I hadn’t gone to that show I would have never known about this.
“So, going from 20 to 5% saved us about £50,000 and then going from 5 to 0% saved a further £17,000. Which, in total, is a huge amount of money. “Dave’s advice and encouragement were crucial in obtaining a successful result. I did not know this third VAT step existed until I met him.”