New legislation, published in March this year, sees a relaxation in planning laws to encourage the conversion of existing buildings in the countryside as opposed to building on greenfield sites. Paul Cowen’s article in the May edition of the Dairy Farmer outlined the planning regulations and opportunities for farm owners. For those thinking of converting a building into a dwelling, or building a new one on the farm, the tax planning considerations should also be factored in.
The most complex tax for new dwellings and barn conversions will be VAT. The rate of VAT that will apply and the amount of VAT that can be recovered will depend on the planning permission and the end use of the building.
At first sight the VAT rate that should be applied by a contractor on his invoices for converting a non-residential property into a single household dwelling or a number of single household dwellings should be the reduced rate of 5%.
A new residential dwelling
Where a new dwelling is being built, if the whole construction is being carried out by a contractor, then their services, including any building materials purchased by them, will be zero rated.
However, if the construction work is carried out by the farming business in-house, all building materials purchased will have VAT charged at the standard rate (20%). Any sub-contractors used, for example a plasterer, should zero rate their services.
All supervisory services such as architect, surveyors and planning consultants are always standard rate irrespective of the work carried out although the combined professional fees and building services can be treated as zero rated under qualifying ‘design and build’ contracts.
When is ‘a dwelling’ ‘not a dwelling’ – beware the effects of planning restrictions
As mentioned above, VAT is a very complex area and full of pitfalls. One such pitfall is the VAT treatment if HMRC’s definition of a dwelling is not met. For example if there is a planning restriction which is generally enforced by what is known as a Section 106 agreement or where the new dwelling cannot be sold separately there could be significant VAT implications. In these cases, for VAT purposes, the building is not seen as a ‘dwelling’. In which case, all construction costs will be liable to VAT at the standard rate of VAT, and the DIY house builder’s scheme (see below) cannot be used to recover the VAT charged.
Where VAT is charged can it be recovered?
The recovery of VAT depends on the end use of the dwelling. If the dwelling is to be occupied by a farm worker then, in most cases, VAT can be recovered in full. If a partner in the farming business is to occupy the property then a reasonable proportion, representing the business use of the property, can be recovered. This can be a contentious area of VAT so advice should be sought.
In addition where holiday accommodation is to be provided from the new dwelling, and VAT on the income received will be charged, then all VAT will be recoverable.
The do-it-yourself house builder and converter’s scheme allows VAT recovery where there is the construction of a building for residential use or a residential conversion for occupation by the owner or a member of the owner’s family. No VAT is recoverable on supervisory services or any other ‘non-building’ services.
If the dwelling is to be rented out then the recovery of VAT will be more complicated. Unless the costs fall within the partial exemption limits it is unlikely that VAT can be recovered.
Capital allowances on farmworkers’ cottages
Another important area of tax to consider when building or converting a new dwelling, particularly if the dwelling is to be used in the business by a farmworker or for holiday accommodation, is capital allowances.
Capital allowances provide relief from income tax for the costs of plant and machinery and integral features. It is often surprising how many items in a dwelling qualify as plant and integral features. For example, this will include the costs of kitchen and bathroom fittings and equipment, blinds and curtains, burglar alarms, carpets, furniture, central heating, water and electrical systems.
In a recent case a client built a new farmworker’s dwelling costing £160k in total. The items qualifying for capital allowances totalled £60k. With the current annual investment allowance set at £500k per accounting year until 31 December 2015, this allowed the total amount qualifying to be written off against the farming profits in the year of build, reducing the overall income tax bill for the business.
It is important that advice is sought early on as your accountant will need to work with the contractors to ensure there is sufficient information in their invoicing to allocate the qualifying costs to capital allowances.