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HMRC internal manual

VAT Construction

Changing the use or disposing of certificated buildings - buildings completed on or after 1 March 2011: example of how the 'change in use' calculation is applied

A charity constructs or acquires a new building at the zero rate of VAT because they have certified that they intend use the building solely for a non-business purpose. The value of the zero-rated supply was £5 million. Had the supply not been eligible for the zero rate, the VAT chargeable (at 20 per cent) would have been £1 million.

The building consists of five equal sized floors.

During the first five years, the building was used as intended. After five years, the charity decides that they will use the top floor of the building for a business purpose.

VAT of £100,000 on a self-supply charge will need to be accounted for. That has been calculated as follows:

  • Value of supply or supplies that would have yielded £1 million VAT equals £5 million.
  • Proportion of the building affected by the change equals one floor out of five - that is, 20 per cent.
  • Number of months remaining in the 10-year period that this part of the building won’t be used as intended equals 60 months out of 120 - that is, 50 per cent.

Therefore, the value of self supply is £5 million multiplied by 20 per cent multiplied by 50 per cent equalling £500,000.

VAT at 20 per cent is £500,000 multiplied by 20 per cent equalling £100,000.

Please remember that a self-supply charge is a charge to and by the person concerned. That person must account for the VAT on the charge as output tax.

If the business use that the top floor is put to a taxable use, then the VAT on the self-supply can be deducted in full. If the business use is exempt use, then no VAT can be deducted. If the business use is a mixture of taxable and exempt supplies, an appropriate partial exemption calculation (Notice 706 Partial Exemption refers) needs to be applied which will allow some VAT recovery of the VAT due on the self-supply.