Saunton Sands

The Small Print...

VAT Implications of Purchasing and Owning a New Holiday Apartment

This note is written as a general guide and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of the contents of this note.

1. Is VAT payable on the purchase price?

Yes VAT is payable on the purchase price at the then standard rate currently 15%.

2. Can a Purchaser recover the VAT paid?

Provided the Purchaser intends to carry on the trade of letting out the apartment then the Purchaser will be able to register for VAT and to recover the VAT paid on the purchase price.

3. Will an Owner who has registered for VAT and recovered the VAT on the purchase price have to charge VAT on the rents that he charges to holiday makers?

Yes, VAT at the standard rate currently 15% must be charged and accounted for to HM Revenue &: Customs ("HMRC").

4. Can an Owner who has registered for VAT recover any other VAT that he incurs in respect of the apartment in addition to the VAT on the purchase price?

Yes, provided the Owner is carrying on the trade of letting out the holiday apartment then he can recover VAT charged on goods and services supplied to him in respect of that trade e.g. VAT on professional fees, service charges, management fees, letting fees, furniture and repairs etc.

5. What are the VAT implications if the Owner wishes to occupy the apartment himself for some part of the year for his holidays?

If an Owner anticipates that he will want to use the apartment for his own use for some part of the year rather than keep it let or available for letting at all times, then he has a choice. If for example the Owner anticipates that he will want to use the apartment for private/non business purposes for 6 weeks in each year then when reclaiming the VAT on the purchase price he can elect to only recover 46/52 of the VAT paid. He will then be allowed to use the apartment for 6 weeks in every year without having to account for VAT on the private use. Alternatively, the Owner can recover the VAT paid on the purchase price in full and then account for private usage each time it occurs. The Owner will have to include in his VAT Returns details of private usage and account to HMRC for the VAT that would have been charged had that usage been paid for at the prevailing market rate e.g. if the apartment lets for £1,000.00 per month exclusive of VAT the Owner will have to account to HMRC for £150 for each month of use.

6. What is involved in registering for VAT?

The Owner will need to submit an application to HMRC confirming the Owner's intention to operate a holiday letting business from the apartment. HMRC may wish to see evidence that the apartment has been purchased by the Owner. Once registered it will be necessary for the Owner to make regular returns to HRMC of all input and output VAT incurred and charged during the relevant period. It would be normal for returns to be made on a quarterly basis. Completing the returns should be straightforward. If a letting agent is employed to let the premises they will be able to provide details of all rents charged and the VAT thereon during the relevant period. Records of any expenditure incurred will need to be kept in order to recover the input VAT charged on such expenditure. There are many firms of accountants who will provide a VAT Return filing service at a relatively modest expense.

7. Can an Owner deregister for VAT?

It is possible for an Owner to deregister if he no longer wishes to continue carrying on the holiday letting business from the apartment or if his annual turnover is less than the statutory limit which is currently £59,000.00 per annum. However if deregistration takes place within 10 years of purchase HMRC would seek to recover some of the VAT originally recovered on the purchase price. In simple terms HMRC are able to reclaim one tenth of the input VAT recovered on the purchase price for each remaining year of the period between the date of deregistration and the tenth anniversary of the purchase of the Property. In other words, if deregistration occurred after 5 years HMRC could recover 50% of the VAT originally reclaimed. There is an exception to this rule where the purchase price is less than £250,000.00. In such cases it is possible to deregister after 3 years without the VAT on the purchase price being reclaimed.

8. Will an Owner who has registered for VAT have to charge VAT on a resale?

If the apartment is sold within 3 years of Practical Completion then the answer is yes irrespective of the amount originally paid for the Property. If the original purchase price is less than £250,000.00 then the Property can be sold after 3 years without the Owner having to charge VAT and without any clawback of the VAT originally reclaimed on the purchase price. If the original purchase price is more than £250,000.00 then the Owner will either have to charge VAT or repay of part of the input VAT recovered on the original purchase price. The same principles apply as to deregistration so that if the Property is sold after 5 years HMRC can recover 50% of the input VAT paid on the original purchase price which has been recovered by the Purchaser. A Purchaser from the original purchaser who is charged VAT will be able to recover this provided that they register for VAT and continue the trade of letting the apartment. Indeed if the letting trade is continued the sale may qualify as a TOGC (transfer of a going concern ) in which event no VAT will have to be paid.

9. What other VAT implications should an Owner be aware of?

If the Owner is engaged in other business activities in his own name but does not exceed the threshold for registering for VAT so that he does not have to charge VAT on the provision of those services, he will need to be aware that any turnover generated from letting the apartment will be added to the turnover generated by his other business activities which may mean him exceeding the VAT registration threshold and thus having to charge VAT on the provision of his other services.

10. Is there any reason why the Owner cannot purchase the Property through a limited company?

There is no reason why this cannot be done and it has the advantage for VAT purposes of keeping separate the supplies made by the Company from those supplies made by the Owner himself in any other capacity.