Working from home has become the new normal. It has become more common for formal businesses to be run from private residences and the trend is likely to gain momentum as the benefits of working from home become more evident. If the business is registered as a VAT vendor, there are pitfalls that home owners should be aware of.
The key concern expressed by most owners of residential property used primarily as a place of private abode and partially for a business carried on, is whether VAT is payable when the property is ultimately sold.
They should however also be concerned about what happens if the property is no longer used for business purposes, either because a move back to a formal place of business or the discontinuance of the business as a result of, for example retirement. This article deals with the VAT implications of when a property is first used for VAT enterprise purposes. In the next article we shall deal with the implications where the property is either sold or no longer used for VAT enterprise purposes.
Properties acquired before 30 September 1991
Special rules apply to residential properties acquired by natural persons before the introduction of VAT on 30 September 1991.
If such properties are used less than 50% for business purposes and no input tax or other deductions have been claimed in respect of such properties before the ultimate disposal of such properties, the sale of such properties is not subject to VAT. The above is the only relief that exists with regards to the sale of residential accommodation partially used for taxable purposes. For all other properties the normal VAT principles must be applied.
Deductions that may be claimed when properties are first used for taxable purposes
Where a property is purchased and immediately used for residential and business purposes, an input tax or notional input tax deduction may be made to the extent that the property is used for business purposes. The percentage floor space occupied by the business activities is normally a fair approximation of the extent of taxable use of the property.
Where a property is purchased exclusively for use as a private residence and is at a later stage also used for business purposes, a VAT deduction with regards to the original acquisition of the property may be made in the tax period that the property is first used for business purposes. The deduction that the VAT vendor will be entitled to is essentially the same amount that the VAT vendor would have been entitled to had the property been used for mixed purposes from the date of acquiring the property (i.e. the deduction is based on the original cost price of the property).
The deduction may be made in the first tax period that the property is used for business purposes. The fact that the property may have been acquired more than five years before it is first used for business purposes is relevant. With regards to properties acquired before 30 September 1991 the VAT vendor may elect not to make this deduction to avoid the ultimate sale of the property being subject to VAT. If the VAT vendor elects to make this deduction, the ultimate sale of the property will be treated in terms of the normal VAT rules.
Use it or lose it …
The deduction when the property is first used for business purposes must be made within five years from the time that the property is first used for business purposes. If it is not claimed within that period, the claim is forfeited forever.
The rules applicable to the acquisition of the property are relatively simple. The disposal of the property is a different kettle of fish! We’ll deal with this issue in the next article.
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