‘I’m starting a project converting and improving a run-down property for residential letting purposes. My builder says he must charge me 20% VAT as he is VAT registered. Is this correct?’
In some cases your builder would be correct; however in many situations you should actually be charged a reduced rate of VAT, at 5% or even zero%.
Unfortunately, there is a tendency amongst many building contractors to charge the 20% rate regardless, simply because they are not expert in VAT and don’t want to take the chance of getting it wrong.
If you aren’t alert to this possibility you may either pass on the project (and potential profits) or be unable to recover the overpaid VAT (and make less profit).
We therefore recommend that you seek specialist advice when you are next considering a property purchase or development project. At the very least, we can help ensure your building contractor doesn’t inadvertently put you off taking on your next potentially lucrative project.
In the meantime, here is a summary of the main issues:
When should I be charged the reduced 5% rate?
A contractor should charge ‘Reduced Rate VAT’ in the following scenarios:
- Conversion of a non-residential building such as an office or warehouse to a house or flats
- Conversion of a house where additional dwellings are created, e.g. one dwelling into 2 flats
- Conversion of multiple occupancy dwellings, for example bed-sits converted back into 1 house
- For works on a residential property that has been unoccupied for more than 2 years
It’s worth noting that this rate will apply to all the ‘construction services’ provided by the contractor during the development.
Any non-construction services that you contract for directly will still carry standard rate VAT (for example furniture, televisions, architects fees, surveyors etc.)
However, if certain non-construction services are part of the overall service provided by the contractor it may be possible to benefit from the lower rates.
It is therefore essential to plan ahead and seek advice as part of planning any building project.
The savings we can help you make are often significant.
When shouldn’t I be charged the 5% rate?
Broadly speaking, a contractor shouldn’t use the ‘Reduced Rate VAT’ in the following scenarios:
- On the construction of new residential properties where the zero rate applies
- All works to commercial properties (except where listed above)
- All other cases where the reduced or zero rates of VAT do not apply
What if my scenario isn’t as clear cut?
Naturally, there will be instances where the intended project doesn’t fall completely within the reduced rate category or within the standard rate category; for example:
Q) What if only part of a commercial property is being converted to residential for example?
A) HMRC simply ask that items attributable to the residential work are charged at 5% and commercial work at 20%, and for the work done on common parts a reasonable apportionment should be used.
Q) What if 2 semi-detached properties are converted into 1 building which is then to be used as 2 flats?
A) In this question, there hasn’t been a ‘change in the number of dwellings’ and therefore the conversion wouldn’t qualify for the reduced rate.
The residential property market has not been easy over the past few years. Making sure you don’t pay more taxes than you should is not just desirable, it is essential for anyone wishing to make profits.
If you are an individual considering a residential property project, or are a contractor looking to tender for one please get in touch and we will be pleased to advise.
Sutton McGrath Hartley is a multi-disciplinary firm of chartered accountants, financial advisers and lawyers offering comprehensive financial expertise for all business, personal and family interests. Our specialist departments can help with VAT and Tax planning. To discuss your requirements please contact David Sutton on 0114 266 4432 or firstname.lastname@example.org.