LAS EVIDENCIAS Y EL PROCESO PENAL
1. El Proceso Penal los Indicios y Evidencias
1.1. Indagación Previa
convert it into dwellings as a business activity, you may be able to claim the VAT on your VAT return. See Chapter 18 for more information about property development as a business activity.
Properties with existing self-contained dwellings and the "90/10" apportionment
106 So if you're buying a commercial property with existing self-contained dwellings and you DID NOT issue the VAT1614D certificate, the vendor should only charge VAT on the commercial parts of mixed properties. This is because the sale of existing residential property is exempt from VAT. You should agree this apportionment as early as possible through the negotiation process. It will also help minimise any stamp duty land tax liability because this is paid on the VAT inclusive purchase price
How do you agree this apportionment? .
In the case of public houses, industry practice is to treat 90% of the property price as business and 10% as domestic for VAT purposes. This means that you’d normally be charged VAT on 90% of the property cost. However, as far as I’m aware, there’s no legal basis for using this apportionment for all property sales.
This apportionment was originally agreed between HMRC and the brewery industry and it is supposed to be used by tenants to calculate how much VAT they can claim on the running costs of the pub.
Also, HMRC state in their internal guidance that this apportionment should not apply if it’s clearly inappropriate. So ask the vendor to apportion the selling price on a more accurate basis, for example based on the relative proportions of floor area.
As explained in Chapter 6, property owners who sell commercial property exempt from VAT may have to repay VAT previously claimed from HMRC and therefore want to charge a higher price to cover this cost, as explained in Chapter 18.
When you can save VAT through reduced rated conversion and renovation services
As explained in Chapter 7, some or all of the construction services which create an additional single household dwelling(s) from an existing property are reduced rated.
Properties with no existing self-contained dwelling
If you create a new dwelling out of a pub or other commercial property, which doesn’t contain any existing single-household dwellings, then some or all of the contractor’s services should qualify for the reduced rate. See Chapter 8 which explains when the reduced rate applies to conversions. The reduced rate can also apply to conversions of properties that have been used as dwellings as long as they don’t contain self-contained accommodation, for example a pub with bedrooms for staff. See VAT Notice 708, s7.3: http://tinyurl.com/mltpyzu.
Properties with existing dwellings
If you convert a commercial property – e.g. a pub – which contains an existing self-contained dwelling, such as a flat on the first floor above the business area, into a single dwelling that
incorporates the whole property, the conversion work would be liable to VAT at the standard rate. The reduced rate ONLY applies if you create additional single-household dwellings.
If you incorporate parts of both the existing commercial areas and the residential areas to create new dwellings, some or all of the work may be eligible for the reduced rate, usually based on how
107 the layout of the new dwellings compares to the previous dwellings. For example, The appendix to Chapter 8 discusses the VAT liability where similar properties are converted in different ways; e.g. horizontally or vertically .
The renovation of any existing dwelling may qualify for the reduced rate if it’s been unoccupied for two years or longer, as explained in Chapter 8.
Commercial developers, the DIY Refund scheme and the zero-rated anomaly
As explained in Chapter 10, the DIY Refund scheme ONLY applies for conversions if you’re creating an additional dwelling from an existing non-residential property; i.e. a “non-residential conversion”. To qualify as a “non-residential conversion” for the purposes of the DIY Refund scheme, you have to create an additional self-contained dwelling from non-residential property.
So what happens if you're converting a property into a dwelling for you and your family and other dwellings to sell as a business activity?
The “self-contained” anomaly
The rules are a bit different for claiming under the DIY refund scheme and if you're converting to sell as a business. The anomaly concerns the situation where commercial property has been USED as a dwelling but where the living accommodation is NOT self-contained.
In VAT Notice 708, paragraph 5.3.1, HMRC say:
"A building is ‘used as a dwelling’ when it has been designed or adapted for use as someone’s home and is so used. "
The conversion of such properties to create a single household dwelling normally qualifies for the reduced rate of VAT on contractors' services, as explained above. However, this isn't sufficient to be regarded as “non-residential conversions”, so don’t qualify for the DIY Refund scheme.
This means that if you convert a pub which doesn’t contain a self-contained apartment, but has been adapted for and used as a dwelling, the conversion into a single self-contained dwelling wouldn’t be a “non-residential conversion”. The conversion would only be eligible for a DIY Refund scheme claim if the properties were unoccupied under the 10 year rule.
There’s no legal definition of “adapted” as a dwelling, but HMRC’s position is that even relatively minor adaptations can be regarded as adapting a property to use as a dwelling. So if, say, a bathroom has been installed for the private use of the residents, this would be regarded as “adapted” as a dwelling.
However, HMRC say that if you create an ADDITIONAL dwelling in the property which incorporates PART of the existing residential area, then you can claim VAT under the DIY Refund scheme but only to the extent that the costs relate to the conversion of the commercial part of the original
108 The definition of “non-residential conversion” has been discussed at length in various VAT Tribunal cases and court cases over the years. HMRC take a very strict approach to the definition and the Tribunal and courts have, typically, agreed with HMRC’s interpretation.
These rules are complicated so it’s not surprising that both DIY and commercial converters get confused.
If you want to be certain about whether your conversion would qualify for the DIY Refund scheme, you can ask HMRC for a ruling before starting the project, but remember that HMRC won’t give “rulings” about
hypothetical situations; nor if they believe that the issue is clearly covered in their public guidance.
If you want to be certain, consider investing in professional advice to find out whether/how much VAT you can reclaim and how much VAT you should be paying on contractor’s services.
And if you find out that you can’t claim under the DIY Refund scheme, it’s better to know in advance so that you can make sure that you have sufficient money in your budget to fund any VAT you can't claim from HMRC.
Commercial property developers and VAT on non-residential conversions
If you convert a large commercial property into a number of dwellings to sell or lease, you may be able to register for VAT and claim the VAT on your costs on your VAT returns. You have to make "zero-rated" supplies of the converted properties, which is when you sell the freehold, or a long lease, in a property and you meet the following criteria:
You grant a major interest in, a building.
The building is the subject of a ‘non-residential conversion’. The building is not converted into a holiday home.
You have ‘person converting’ status.
The grant of a major interest is your first grant. Where necessary, you hold a valid certificate.
See VAT Notice 708, paragraph 5 http://tinyurl.com/kfatbb6.
See Chapter 18 and Appendix 4 for further information about property development as a business activity and registering for VAT.
If you create an ADDITIONAL dwelling in
the property which incorporates PART of the existing residential area, you
can claim VAT under the DIY Refund Scheme but only
to the extent that the costs relate to the conversion of the commercial part of the
109 Chapter 17: Checklist
You can normally claim VAT under the DIY HomeConverters Refund Scheme if the conversion of a commercial property creates an additional self-contained dwelling.
You can’t claim under the scheme if the property was previously used as or adapted as a dwelling within the previous 10 years, even if the domestic accommodation wasn’t self- contained.
If you’re creating an additional dwelling, you can only claim VAT on the cost of converting the non-residential part of the property.
The reduced rate for conversion services normally applies to both conversion of properties with existing dwellings to change the number of dwellings, or any other accommodation used as or adapted as a dwelling, even if it wasn’t self-contained.
If you create additional dwellings to sell or lease, you may be able to register for VAT and claim VAT on costs if they you sell zero-rated freeholds or long leases in the converted properties.
110 Case studies
DIY VAT claims and the final VAT costs Arthur's self-build
Under the DIY refund scheme, Arthur can claim VAT on building materials:: £60,000 @ 20%: £12,000 Final VAT cost: VAT on expenditure (see p117): £18,400 less DIY claim £12,000 = £6,400 Compared to the potential worst case scenario, this represents a saving of (£40,800 - £6,400): £34,400
Mike and Sue: conversion
Basic fit out: £160,000 @5%: £8,000
Power, water & sewer less cost of connecting to main services* (£10,000 - £2,000) @5%: £400 Goods that aren’t “builders’materials” bought by the claimants: (£18,000 - £4,000) @ 20%: £2,800 Total amount for DIY Refund Scheme: £11,200
Final VAT cost: VAT on expenditure (see p 118): £18,000 less DIY claim £11,200 = £6,800
111 Section 4: Other stuff and the FAQs
Chapter 18
Developing as a business activity
One way of getting into property development as a business activity is doing your own new construction or conversion or renovation.
Many of us have leased property to tenants at some point or other. I leased a house for a couple of years, although it wasn't done intentionally as a business activity but because I hadn't been able to sell because the property market was so bad at the time. A lot of people build up a residential leasing business by acquiring properties over a number of years, perhaps to fund their pensions. Alternatively, you might have bought an old house, renovated it and sold it to see whether you're any good at it then decide to do it as a full time business.
But whatever the size and scale of your property development, you need to understand the main VAT principles for business, or you could end making a lot of expensive mistakes, to say nothing of the hassle and time to sort it all out.
So this chapter is for those of you who have either just started or are considering developing
property; particularly dwellings; as a business activity. It explains the most common situations when you can register for VAT and claim VAT on your costs.
If you want more information about registering for VAT and other practical VAT issues, see Appendix 4: Being a VAT registered business. This is a chapter from my book: "VAT and residential property development" which is a more detailed guide for property development business owners.
What do you want to do? Develop and sell or develop and lease? Or both? How does this apply to residential property development?
o Zero-rated sales
o Listed buildings
o Holiday lets
VAT registration and claiming VAT on costs Introduction to commercial property Appendix
Claiming VAT on costs for VAT registered property developers
What do you want to do? Develop and sell or develop and lease or both?
Whatever type of property business you're planning, remember the basic VAT rules which are explained in Chapter 1:
VAT is a tax on the sale of goods and services. Businesses have to register for VAT and charge VAT if their income exceeds the VAT registration limit, which is now £85,000 per year (from 1 April, 2017). There are 3 different rates of VAT:
112 the standard rate of 20%
the reduced rate of 5%; and the zero-rate*
These are called "taxable supplies". VAT registered businesses who sell taxable goods and services can claim VAT on their costs. The VAT on their sales is output tax and the VAT on their purchases is called input tax.
*There is also another class of sales which are exempt from VAT. Like zero-rated sales, the business doesn't charge VAT on their sales but because their income is VAT exempt, they can't normally claim VAT on their purchases. For example, if you're currently renting your home, the rent is VAT exempt so your landlord can't claim VAT on his costs. Sales of existing dwellings are also exempt from VAT. So how does this apply to residential property development?
The sale and rent of most residential property is exempt from VAT. If your only income is VAT exempt, you can't register for VAT or claim VAT on your costs (except in the limited conditions mentioned below "When you can claim VAT on costs"). This applies to most residential landlords. However, there are 3 specific situations where you can make taxable supplies of residential property:
Zero-rated freehold sales or long leases
The zero-rate can apply to the freehold sale or grant of a long lease by the person who has
constructed a new dwelling, or certain other residential properties or property for certain charitable purposes. In this book, we're focusing on dwellings, although similar rules apply to these other residential properties or properties for charitable use.
The zero-rate can also apply to the freehold or grant of a long lease* by the person who has converted of a non-residential property or part of a property into a dwelling or certain other residential properties. These conversions are called "non-residential conversions".
The technical term for such transactions is the "grant of a major interest". This means:
the freehold
in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
in relation to Scotland, the estate or interest of the owner, or
in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years
VAT Notice 708, paragraph 4.2 http://tinyurl.com/otedchh
This is a complicated areas of the law and the circumstances must meet all of the criteria set out in the legislation to qualify for zero-rating. The actual law is shown in the box below:
113 In either case, if you're considering developing new properties for sale or lease, or converting for sale or lease, make sure that you understand the detailed criteria that are set out in Notice 708, section 4 (new residential buildings including dwellings) or section 5 (non-residential conversions) and ensure that you meet ALL of them.
Listed buildings
The zero-rate also applies if you substantially reconstruct a listed building and sell a major interest. The provisions are similar to those for new dwellings and non-residential conversions. Like those provisions, the zero-rate also only applies for sales of dwellings and certain residential and charity buildings.
The term "substantially reconstruct" essentially means that the building is rebuilt from a shell, or that at least 60% of the work would have been "approved alterations" under the rules for construction services on protected buildings until 2012.
More detailed information is in VAT Notice, 708, paragraph 10 http://tinyurl.com/nyo6hog. Holiday lets
The other taxable supply is if a dwelling or other property is used for holiday lets, which is normally for a stay up to 28 nights. Income from this activity is standard rated. See Chapter 20 for more information about holiday lets.
Appendix 4 is an extract from my book "VAT and residential property development" which is a guide to the subject for commercial property developers. It explains how and when to register for VAT; and when you can register BEFORE making any sales so that you can recover VAT on expenditure during the course of a construction or conversion development.
VAT registration and claiming VAT on costs
As a business owner, you can only claim VAT on your costs if you register for VAT. You can register for VAT and claim some or all of the VAT on your costs as long as you make some taxable supplies. You MUST notify HMRC that you are liable to register for VAT when your taxable sales exceed the VAT registration limit, which is currently £85,000 per annum (i.e. the end of any 12 month period).
“The first grant by a person - (a) constructing a building –
(i) designed as a dwelling or number of dwellings; or
(ii) intended for use solely for a relevant residential or a relevant charitable purpose, or (b) converting a non-residential building or a non-residential part of a building into a building
designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose,
of a major interest in, or in any part of, the building, dwelling or its site.” Extract from VAT Act 1994, Schedule 8, Group 5, Item 1.
114 This could include zero-rated property sale(s) and income from any other taxable business activity such as holiday lets. You can also register for VAT on a voluntary basis if your turnover is below the registration limit. In these situations, you would be able to recover VAT on expenditure relating to your zero-rated sale(s) and other taxable income.
For example, you might sell a new house which qualifies for the zero-rate, you might have standard rated income from holiday lets and also receive exempt rent from a couple of short term residential leases.
The appendix to this chapter includes an introduction to the complex rules about claiming VAT on costs for VAT registered businesses.
As a residential developer, chances are that you won't have to deal with these issues unless and until