Renovation profits taxed as income

PG writes: I have been involved in property investment and now wish to start renovating property with a friend, with a view to selling on the properties at a profit. We believe there is a reasonable return to be made, especially as we will do most of the work ourselves. We are concerned about the taxation aspects and in particular capital-gains tax and Vat. Please give us guidance?

Answer

It is likely that profits from your renovation business will be taxed as income rather than as capital gains. This is because the nature of the transactions is of a trade rather than the realisation of an investment. The precise treatment will depend on the facts and there are six "badges of trade" that the Inland Revenue looks for in determining how the profits should be taxed. If you are carrying out a trade, the profits will be taxed as income of the partners in your business. As regards Vat, a business that buys and sells houses is classified as exempt for Vat purposes. This means you will neither charge Vat on the sale price nor recover Vat added by your suppliers to the costs you incur. Should your business involve converting commercial or industrial buildings into dwellings, and then selling the freehold or creating a long lease, that activity is zero-rated for Vat purposes. This means that you do not charge Vat on the sales price but you can recover Vat added by your suppliers. We assume you will not be substantially reconstructing protected buildings or building new houses, but these would also be zero-rated. If you have a mixture of both exempt and zero-rated sales you will need to keep the costs separate and apportion the Vat added by your suppliers in respect of general overheads as it is likely that Vat will be only partly recoverable.