Whether your UAE property market is commercial or residential, whether you are renting or buying property to sell, VAT is an important factor to consider. As a real estate transaction investor, you may have a simple question like How to avoid paying VAT. Do I have to pay VAT on my rent? How do you avoid paying VAT on commercial real estate? But the answer is not always simple and can depend on dozens of factors. Real estate investors have a variety of VAT rates applicable to their business (Standard Rate – 20%, Reduced Rate – 5%, Zero Rate and Tax-Free). Different types of businesses have different rates applied, which are explained below:
VAT on housing rent
Most landlords don’t have to worry about VAT on real estate. For what? Because housing rental is exempt from VAT on real estate. The exemption applies whether it relates to the letting of residential property by way of individual letting, HMO (House in Multiple Occupations) or Rent2Rent. However, serviced accommodation (e.g.
Airbnb) is not exempt because it is considered holiday accommodation and is therefore classified as standard.
VAT on serviced accommodation
Serviced accommodation is a taxable supply and is subject to 20% VAT. If your business sells more than the VAT registration threshold, then you need to register for VAT on real estate.
Businesses sellers below the VAT registration threshold (£85,000 for the 2022/23 tax year) are not required to but can register voluntarily. On the one hand, voluntary registration can help recover input VAT paid to suppliers. But on the other hand, customers may be reluctant to pay additional VAT on real estate. Therefore, voluntary registration is not always beneficial.
However, the usual VAT on real estate on serviced accommodation is not entirely favorable for Rental serviced accommodation.
This has given rise to another hot topic of discussion:
the Tour Operator Escrow System (TOMS). According to TOMS, unlike the conventional regime, VAT is paid on the company’s deposit amount. The recent court ruling in the Sonder Europe Limited case has brought a sigh of relief to properties rented as Serviced Housing.
Currently, based on the judgment in the above case, VAT TOMS for serviced accommodation represents potential tax savings for serviced accommodation.
My VAT-registered business provides holiday accommodation and house rentals. you will need to consult expert accounting services.
Can I declare input VAT related to residential real estate?
Input tax is payable only if it is directly related to a taxable supply. Rent of residential real estate is not a taxable service (exempt from VAT). Therefore, you are not allowed to declare input VAT.
You can only claim input VAT on real estate transaction on costs related to serviced accommodation (because you charge VAT to your serviced accommodation customers).
VAT on new housing development projects
New residential developments are zero-rated, so you can reclaim the VAT you paid to suppliers for development work. If you spend £1.2 million on a property development that includes £200,000 in VAT, you can reclaim £200,000 in VAT from HMRC. However, the rules for this are quite complicated, and therefore, it does not work so simply.
To qualify for a zero rating, the supply must first include the granting of a principal interest in a dwelling, a related residential property or a related charitable property. Primary benefit means permanent ownership or a 21+ year lease. Residential construction, student accommodation and retirement homes are generally eligible.
VAT when converting real estate
Another area of generous VAT relief for property developers is property conversions.
1. VAT on commercial to residential conversions
This is also zero-rated, meaning you can reclaim the VAT you paid on the building work.
Converting a pub into an apartment for living and converting a factory into a residence. The qualifying conditions are similar to those listed above for new housing.
2. VAT on house conversion (change in number of houses)
A reduced VAT rate of 5% applies to certain qualifying services provided for a change of residence. This only applies where the conversion changes the number of dwellings in the property. For example, converting a three-bedroom house into two apartments will qualify for a discount.
3. VAT when converting into HMO (Multi-occupation housing)
Converting personal accommodation into collective accommodation will help you reduce the VAT rate. So, if you are converting a three-bedroom house into an HMO, the conversion will qualify for a 5% VAT rate reduction. Applying for planning permission and building control approval is essential to benefit from reduced rates.
4. VAT on commercial goods
The sale of freehold property in an unfinished or new commercial building is valued at the standard rate (20% VAT). If you sell a newly built freehold office building, you must charge 20% VAT. However, leasing a commercial building or old commercial building (over three years old) is not taxable unless a tax election is made.
Whenever there is an exempt supply of commercial land or buildings, the owner has the option to convert that supply into a standard taxable supply by selecting the “taxation option .”In doing so, the VAT that the homeowner has paid on regular expenses and building work can be recovered from HMRC. This option is exercised on a building-by-building basis and not across the entire real estate portfolio. If you want to avoid paying VAT on business goods but can’t, here’s a way to get a VAT refund.
Let’s say you buy a new commercial building for £1 million. As this is a standard supply, the developer will charge you VAT of £200,000. If you choose to tax, you can reclaim £200,000 of VAT paid – otherwise, you’ll lose £200,000. In this case, it would be wise to choose the “tax option .”However, the “tax option” is not always the best option. Let’s say you intend to rent the property. When you select the “taxation option,” you must calculate VAT on your rent. Your tenant (like you) will only be happy to pay VAT if they can recover the amount of input VAT.
Frequently asked questions related to VAT on real estate activities
How to reduce value-added tax (VAT) on real estate transactions?
Now that we have discussed the impact of VAT on various TOGC and asset transactions, we can structure the deal to minimize our VAT liability. Buy real estate with a company.
When you purchase commercial real estate from a seller who elects to tax, the TOGC provisions may be applied to the sale of the real estate (provided all necessary conditions are met).
This way, you won’t have to pay VAT when buying commercial real estate. Its impact goes beyond simple VAT. By implementing this agreement, Land Stamp Duty will also be significantly reduced.
In short, you can avoid VAT on commercial goods by meeting the conditions for TOGC status. Recovering input VAT but not charging it to customers – real estate development activities If you are a residential real estate developer, the sale of residential real estate is zero-rated and constitutes taxable revenue tax. Where all or most sales are zero-rated, the property developer is not required to register for VAT even if the turnover exceeds the threshold limit.
So, a developer can choose not to register even if sales exceed the threshold (currently £85,000).Although you will avoid a lot of red tape by not having to register, it is still beneficial to register for VAT to recover input tax paid as long as the property being developed is not for rental purposes.
Buy a commercial property and use it as a home.
If you buy commercial goods that the seller has chosen to tax, you must pay VAT. But if you intend to turn the property into a residence, you may be able to get VAT exemption on the purchase. You must fill in the form VAT1614D.
What is the significance of Value Added Tax (VAT) in this regard?
The meaning of VAT when selling real estate varies depending on the type of sale you are making. When selling real estate in the ordinary course of business, you must follow the standard rules (i.e. 0% for newly developed residential properties, 20% for commercial properties less than three years old). Age and are exempt in most other cases). However, be especially careful when selling real estate with your entire business. If you sell assets alongside your business, you may not need to charge VAT on the assets sold. This transfer is called transfer-to-continuous (TOGC).
But as noted above, there are some conditions for the sale to be considered TOGC. It is important to determine whether the sale qualifies as TOGC, as this may result in incorrect VAT charges.