The VAT 1614D procedure: the FAQs

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    Anonymous

    If you’re buying an old barn or pub to convert into your home, or buying an office block to convert into luxury apartments, you can avoid (legally!!) paying VAT on the purchase even if the vendor has opted to tax the property. How? By using the VAT 1614D procedure.

    This applies when the vendor has “opted to tax” the property, which normally means that he has to add VAT to the sales price. Using the VAT 1614D certificate means that the vendor has to sell the property to you without VAT.

    EVERY RESIDENTIAL PROPERTY DEVELOPER NEEDS TO KNOW THIS BECAUSE IT’S THE EASIEST WAY TO SAVE A LOT OF MONEY.

    The way the calculations work, your actual cost is reduced by 16.67%. Why is this when the standard rate of VAT is 20%? This is how it works:

    • Net property cost: £300,000
    • VAT @20%: £60,000
    • VAT inclusive price : £360,000

    The proportion of VAT on the VAT exclusive cost is 20%. The proportion of VAT on the VAT inclusive price is £60,000/£360,000 = 16.67%.

    Either way, it could be a lot of money.

    If you’re buying an opted property for residential use/conversion, then you must give the certificate to the vendor before the price is legally fixed. In practice, this usually means before certificates are exchanged or “heads of terms” are signed. Most solicitors are aware of the procedure and will ensure that the vendor is aware that the certificate will be issued.

    If you’re buying to convert for your own home, you can’t claim VAT on the property purchase under the DIY converters scheme. So it’s essential that you understand the VAT 1614D procedure and make sure that you issue the certificate on time.
    The main rules are explained in VAT Notice 742a, Opting to tax land and buildings; section 3: http://tinyurl.com/qbrewhq. However today I want to answer some of the most commonly asked questions about the procedure which aren’t explained in the Notice.

    FAQ 1: If I issue the certificate, does this mean that I have to buy the property?

    No. It’s only telling the vendor that he can’t charge VAT IF you purchase the property. I usually recommend issuing the certificate as soon as you’re considering making an offer for the property to give the vendor plenty of notice. You might issue certificates for a couple of properties to cover your potential options.

    FAQ 2: What about if I’m buying at auction?

    If you’re buying at auction, you can submit a certificate in the same way, but make sure you do this BEFORE the date of the auction, because the auction price is the “legally fixed” price. If you don’t know the identity of the buyer, contact the auction house and ask for this information. Most property auctioneers are aware of this procedure nowadays and will facilitate the procedure.

    FAQ 3: How does this work if I’m buying a property that is part residential, e.g. a pub with a flat upstairs?

    The option to tax generally only applies to “non-residential” properties, so if the vendor has opted to tax a property, VAT is only charged on the non-residential part of the property. But hopefully you won’t have to pay any VAT if you’ve used the VAT 1614D procedure.

    FAQ 4: The vendor wants to charge me more because I’ve issued the certificate. Why is this? Is it legal?

    Selling the property exempt from VAT might mean that the vendor can’t claim VAT on his costs from HMRC. If the property costs over £250,000 it can also mean that the vendor has to repay VAT claimed from HMRC in previous years.

    Is it legal? Yes. Suppose your vendor agreed to carry out certain repair works before you buy the property – it’s simply his cost and he can chose whether to bear it or whether to pass it in as part of the exempt sale price.

    FAQ 5: What happens if I don’t issue the certificate on time? Can I send it later?

    HMRC say that the vendor can chose whether to accept a late certificate, as long as they receive it before the deal is completed – see VAT Notice 742a, s3.4.4 http://tinyurl.com/qbrewhq for more information.

    FAQ 6: Stamp duty land tax

    If the purchase is liable to stamp duty land tax, (“SDLT”), issuing the VAT 1614D certificate has the additional benefit of reducing the amount of SDLT you have to pay because SDLT is normally charged on the VAT inclusive price. So if you don’t pay VAT, then you don’t pay as much SDLT. Another good reason to use the VAT 1614D certificate.

    Either way, if you’re considering buying to convert for either personal use or for your business, make sure you get the VAT right and don’t smash your budget at the start with an extra 20% VAT on the purchase price.

    Marie

    March, 2016

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