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Acquiring commercial sites to convert to residential use is proving an increasingly popular strategy among property developers<\/a>.<\/p>\n There seem to be several factors driving this trend. These include good availability of vacant commercial sites, and a growing demand for residential space. In addition, commercial locations can carry permitted development rights, which ease planning restrictions for developers.<\/p>\n A word of warning, though: the VAT implications when converting commercial to residential is a minefield.<\/p>\n It\u2019s very different to developing bare land, for example, or redeveloping an existing residential site. These arrangements rarely expose developers to the most intricate aspects of VAT.<\/p>\n Converting commercial to residential, however, does have some extremely complex VAT implications. It\u2019s easy to get caught out, and the cost of doing so will hit development profits.<\/p>\n Let\u2019s take a look at some of the pitfalls. And I stress \u2018some\u2019 \u2013 the list below isn\u2019t exhaustive.<\/p>\n Developers will know that commercial property begins life exempt from VAT. But owners may have waived that exemption (sometimes known as \u201copting to tax\u201d) at some point during their ownership of the property.<\/p>\n If the vendor has taken this option on the site you\u2019re acquiring, then 20% VAT will be added to your purchase price.<\/p>\n Before finalising contracts, therefore \u2013 and preferably before agreeing Heads of Terms \u2013 you need to check whether the owner has elected to waive the VAT exemption. Otherwise, you could end up with a large, unexpected VAT bill.<\/p>\n You\u2019re probably thinking that the obvious solution to the above scenario is simply to reclaim the VAT.<\/p>\n In most cases, you\u2019d be right. Though bear in mind that it takes several months, which will impact cash-flow.<\/p>\n But to reclaim VAT, you will of course need to be VAT registered. And that\u2019s where the delay lies. Developers often use Special-Purpose Vehicles (SPVs) to purchase sites, which are rarely VAT-registered.<\/p>\n You can apply to HMRC to register an SPV for VAT, but it\u2019s not a user-friendly process. Many applications are delayed or rejected because the case isn\u2019t presented properly. You\u2019ll need technical advice to help present your case, and to ensure your application is approved with minimum delay.<\/p>\n Also, care must be taken over the date on which you register for VAT to ensure you maximise your VAT recovery.<\/p>\n Stamp duty land tax (SDLT)<\/a>, currently set at rates of up to 5%, is charged on the gross purchase price of property. So if your vendor has elected to waive VAT exemption on the site you\u2019re buying, this will increase your SDLT liability \u2013 whether or not you subsequently reclaim the VAT.<\/a><\/p>\n There will be further complexities if the site you\u2019re acquiring isn\u2019t completely vacant.<\/p>\n Taking over tenants in a building that is already let means your purchase may come under the Transfer of Going Concern (TOGC) rules, which will have VAT implications.<\/p>\n The key word here is \u2018may\u2019. Whether your transaction constitutes a TOGC or not depends on several factors: the terms of the sale contract, the commercial relationships and terms of the rental contracts between the vendor and the tenants, and a host of requirements to be VAT registered and opting to tax.<\/p>\n TOGC sales are ignored for VAT purposes, which is obviously beneficial for developers buying sites, as it avoids pitfalls 2 and 3. But vendors may not deal with this as strictly required, and could end up charging VAT.<\/p>\n What\u2019s more, any VAT paid on a TOGC in error is NOT refundable by HMRC.<\/p>\n Converting a commercial site to wholly residential use is one thing, but developing it for mixed use creates yet more complexity.<\/p>\n Commercial units are treated differently for VAT purposes than residential ones, which affects the VAT you can recover on any expenditure, and the amount to charge on an eventual sale. What\u2019s more, the VAT status of the commercial space will differ depending on whether it\u2019s sold freehold or as a long lease.<\/p>\n So whether you acquire a commercial site that is VAT-exempt or opted to tax, you need to consider your own strategy for waiving VAT exemption. Your decision will depend on your proposals for the site, and on the need to avoid a troublesome VAT position \u2013 for yourself and for potential buyers.<\/p>\n There\u2019s never a black-and-white solution to these scenarios. In each case, the right approach will depend on the nature of your business, the details of the site you\u2019re acquiring, and your plans for its development.<\/p>\n Demand for commercial sites is high, and you\u2019ll need to move fast to snap them up. But you must take time to consult a technical expert on the VAT implications first. Somebody who not only understands the rules, but can interpret what they mean for your business.<\/p>\n <\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Acquiring commercial sites to convert to residential use is proving an increasingly popular strategy among property developers. There seem to be several factors driving this trend. These include good availability of vacant commercial sites, and a growing demand for residential space. In addition, commercial locations can carry permitted development rights, which ease planning restrictions for[…] <\/p>\nPitfall 1: Election to waive exemption<\/h2>\n
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<\/p>\nPitfall 2: Reclaiming VAT<\/h2>\n
Pitfall 3: The SDLT premium<\/h2>\n
Pitfall 4: TOGC<\/h2>\n
Pitfall 5: Mixed use<\/h2>\n
The right solution<\/h2>\n