SAICA ITC JUNE 2022 SUGGESTED SOLUTION PAPER 1 PART II

Part (f) On the assumption that the company does convert an office building into residential accommodation units (see para. 6.2) – 

 discuss the VAT consequences for Beeprop; and 

 suggest an alternative to any adverse VAT consequences.

ANSWER

Okay, imagine Beeprop has an office building like a shop.

1. Right now, renting out the office is like selling things with tax. Beeprop can get back the tax they paid on fixing up the office.

2. If they turn it into flats for people to live in, that's like selling things without tax. The government doesn't charge tax on rent for homes.

3. Problem 1: Paying back old tax. Because they're switching from "with tax" to "without tax," Beeprop has to pay back some of the tax they already got back on the office building. It's like the government saying, "You got a tax break for a shop, but now it's a home, so pay it back!"

4. Problem 2: New fixes cost more. Any money they spend to change the office into flats, they can't get the tax back on those costs. So, it makes the renovation more expensive for Beeprop.

5. Problem 3: Less tax breaks later. Beeprop does other business too. If more of their business is "without tax" (flats), they'll get fewer overall tax breaks on their shared costs in the future.

6. Solution: If they made the flats like a hotel or serviced apartments (where they also provide services like cleaning), then it would be considered "with tax" business again. This way, they avoid all the problems above and can still get tax back on renovation costs.

This document explains the VAT implications of converting a commercial office building (taxable supply) into residential accommodation (exempt supply) for Beeprop.

Key points:

• Office Letting: Originally a taxable supply, allowing 100% input VAT claims.

• Residential Letting: An exempt supply; no VAT charged on rent, no input VAT claims on related costs.

• VAT Adjustment (s18(1)): Converting from taxable to exempt use triggers an output tax adjustment based on the building's open market value, effectively clawing back previously claimed input VAT.

• No Input Tax on Conversion: Costs to convert to residential units cannot have input VAT claimed, increasing the effective cost.

• Mixed-Use Vendor: Beeprop will become a mixed-use vendor, requiring input tax apportionment, likely reducing future claims on shared costs.

• Alternative: To avoid these negative VAT consequences, convert to "commercial accommodation" (e.g., furnished apartments with services), which is a taxable supply.