VAT and construction works – 5% VAT reduced rate

Written by: Jay McKinnon

VAT Director

Last reviewed: 13 July 2026

If you’re thinking of renovating an empty dwelling, converting a commercial property into a residential property, 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 apply in these scenarios.

The reduced 5% VAT rate can apply to certain residential renovation and conversion projects, including empty homes, commercial-to-residential conversions and projects involving a change in the number of dwellings. This guide explains when the 5% VAT rate applies, what construction services qualify and when standard-rate VAT must still be charged.

When Does the 5% VAT Rate Apply?

Where conversion or 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%).

The 5% VAT rate applies to:

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

What Construction Services Qualify for the 5% VAT Rate?

The 5% reduced VAT rate can be applied to services relating 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% VAT-rated service is provided, the reduced rate can also be applied to the supply of building materials if they are supplied as part of that service.

What Does Not Qualify for the 5% VAT Rate?

All other related goods and services are generally standard-rated for VAT, including:

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

Evidence Required for Empty Property Renovations

For qualifying renovations under the empty home provisions, evidence of the two-year vacancy period immediately before the commencement of works is required before the reduced rate can be applied.

HMRC’s preferred form of evidence is a letter from a local authority Empty Property Officer. Other acceptable forms of evidence may include:

• Council tax records
• Utility bills
• Other documents demonstrating continuous vacancy

Ensuring the correct evidence is available before construction starts can help prevent delays and disputes regarding the VAT treatment of the project.

VAT Recovery for Property Developers

Typically, 5% 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 when completed.

Input VAT at 5% may be recoverable when:

• 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.

Need Advice on 5% VAT for Property Renovations or Conversions?

Determining whether construction works qualify for the 5% reduced VAT rate can have a significant impact on project costs. The rules commonly apply to qualifying empty-property renovations, commercial-to-residential conversions and projects involving changes in the number of dwellings. However, evidence requirements, exclusions and VAT recovery considerations should be reviewed carefully before work starts.

It is common for builders carrying out the works to be uncertain about the correct VAT treatment or concerned that HMRC may challenge the position. We can offer guidance and, where appropriate, provide a supporting letter outlining the basis for applying the reduced rate.

If you have any questions about how the 5% reduced rate of VAT may apply to your project, please get in touch with our advisory team.