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Serviced Accommodation – Greatest Opportunity in Real Estate? – and don’t forget the VAT!

There can be no doubt that the way we work, live, holiday and even build properties is changing from the traditional “norm” to hybrid and new versions of change. Primarily driven by advances in technology and materials and then overtaken by global events such as the pandemic. Human nature is changing, and with that change comes opportunity for new markets.

Discussing the market with a developer client of mine last week, I listened with interest as he told me that he was changing his business model. Traditionally, he had always searched the market and found former commercial buildings in good central locations with parking, acquired the property and then converted to residential apartments and sold on the open market. They were massively helped by the Help-to-Buy scheme and you could consider his business a big success. However, after in his words “catching a cold” on one particular large development, his company had decided to change track. Instead of building apartments and then selling, they wanted to build serviced apartments, retain the asset then refinance out the debt after 2-3 years of trading. The margins and cash flow forecasts were certainly impressive based on relatively modest occupancy.

The Serviced Accommodation sector is certainly one that is growing.  As always, location is very important on profitability as well as services available, and overnight pricing in order to pull clients away from the traditional hotel stays.

But what about VAT on Serviced Accommodation?   This falls under the VAT Notice 709/3 which covers rules for accommodation in the UK. This means that VAT should be charged however there is the  Reduced Value Rule’ for longer stays, which states that if a guest stays in your accommodation continuously for more than 28 days, from the 29th day onwards, the rent element of the stay no longer becomes VAT-able for the guest. Nevertheless, VAT charges must still be enforced on any facilities and services that are included in the stay selling price. The minimum amount of the price that is relating to facilities is 20% and if you are charging VAT, your operating company will need to be VAT registered with HMRC.

So if you are looking to develop in this sector, and acquire a suitable building the likelihood will be that the building is “opted to tax” and VAT will need to be paid on completion to secure the opportunity. A specialist VAT lender such as Adsum Finance will be able to provide this VAT funding and work with you recover the funds direct back from HMRC.

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