VAT and construction works – 5% VAT reduced rate

If you’re thinking of renovating an empty dwelling, converting a commercial property to a residential, or converting a single dwelling into multiple dwellings (but you’re not sure if you can afford to, especially if VAT is payable at 20% on costs), it’s important to be aware that the 5% reduced rate of VAT can come into play in these scenarios.

Where conversion/renovation works are undertaken, and the services and any goods provided as part of the construction service are incorporated into the fabric of the building, you can request that the supplier charges VAT at the reduced rate of 5% (rather than the standard rate of 20%).

Where the 5% rate of VAT applies:

  • Conversions of commercial property to residential.
  • Conversions involving a change in the number of dwellings (e.g., large house into flats or vice versa).
  • Renovation of dwellings which have been empty for at least 2 years (as evidenced by council records).

Specific services within the scope of the 5% rate of VAT:

The 5% reduced rate can be applied to services in relation to:

  • The fabric of the building (e.g., walls, roofs, floors, windows and doors)
  • The means of providing water, power, heat or access to the building (where carried out within the immediate site).
  • The means of providing drainage, security or waste disposal for the building (where carried out within the immediate site).

Where a qualifying 5% rate service is provided, the reduced rate can also be applied to the supply of building materials if they are being provided alongside this service.

Where the 5% rate does not apply:

All other related goods/services are standard rated – for example:

  • The hire of goods & tools.
  • Landscaping.
  • The supply/erection of scaffolding.
  • Materials purchased directly from the builder’s merchant.
  • The installation of goods that are not building materials (e.g., carpets and fitted bedroom furniture).
  • Professional feels of architects, lawyers, surveys, etc.

Evidence requirements:

For qualifying renovations under the ’empty home’ conditions, evidence of the 2-year vacancy immediately prior to the commencement of the works is required before the reduced rate can be applied. HMRC’s preferred form of evidence is a letter from a local authority’s Empty Property Officer. Other forms of evidence are also acceptable, such as council tax records or utility bills.

Specific considerations for Developers (recovery of 5% VAT)

Typically, any 5% rated VAT incurred in relation to a dwelling renovation, or conversion will be irrecoverable (for VAT registered developers) if there is an intention to sell or long let the property upon completion.

However, input VAT at 5% will be recoverable in the following scenarios:

  • If the residential property was empty for 10 years prior to starting the works any onward sale will be Zero rated, and thus related input tax will be recoverable subject to the normal rules.
  • If it is intended that the property will be used as a furnished holiday let upon completion, any future letting income will be taxable to the standard rate and therefore related input tax incurred on the renovation or conversion works will be recoverable subject to the normal rules.

Please note that the information in this guide is of a general nature and seeks to highlight some of the issues which could be affecting you and/or your business, including changes to financial regulation and legislation. Readers should not rely on this information without seeking professional advice on its application in their circumstances.

Any questions about 5% VAT on construction projects?

It is common for builders carrying out the works to be uncertain over the correct rate of VAT applicable or concerned that HMRC may challenge the position. In that regard we can offer guidance and if required a letter outlining the basis for the 5% rate, which is often sufficient to help get the project underway.

If you have any questions about how the 5% reduced rate of VAT may be applicable to your projects, please get in touch with our Henderson Loggie advisory team.

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