Business Clinic: Claiming VAT on building conversion costs

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Craig Tolliday, associate with accountant Azets advises on how trusts can protect assets and in some cases save tax.

Can a farmer converting a farm building into residential accommodation with the intention of selling it recover the input VAT on the conversion through the farm VAT returns? Would the sale be zero-rated and therefore input VAT fully recoverable?

VAT on conversions can be a complex area. In most circumstances the sale of a building that is not new would be exempt from VAT, which would prevent the recovery of VAT on any conversion costs.

However, the sale of a non-residential building following its conversion to a dwelling can be a zero-rated supply. This would then allow for recovery of VAT on any conversion costs.

See also: Business Clinic – can my farm be sold tax free after inheritance?

In this instance, to zero-rate the supply, the following basic conditions need to be met:

  1. You grant a major interest in a building (typically the freehold or a lease for a term exceeding 21 years).
  2. The building is the subject of a ‘non-residential conversion’ (this is typically when the building being converted has never been used as a dwelling. HMRC guidance specifically gives examples of such buildings, which includes an agricultural building such as a barn).
  3. The building is not converted into a holiday home (typically this is where the purchaser is prevented from residing in the accommodation throughout the year, or as their principle private residence, by the terms of a covenant or planning restriction).
  4. You have ‘person converting’ status (this usually means that you physically converted, or commissioned another person to physically convert, a building that you own or have an interest in).
  5. The grant of a major interest is your first grant (i.e. only the initial sale, or long lease, of the building can be zero-rated).
  6. Where necessary, you hold a valid certificate (only relevant for specific categories of buildings).

The above is a very brief outline, and within HMRC’s guidance (VAT Notice 708) you can find much more detailed information about the various conditions which need to be met.

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