VAT for Residential Property Builds and Conversions

The world of VAT on Properties is a minefield – especially in relation to new build residential property and conversions. Here, I identify some of the problem areas:

Building a dwelling from scratch generally qualifies for the zero rate of VAT. The key to whether the zero rating applies lies in the details of the planning permission: it is important to speak to a VAT expert prior to starting the project. The zero rating covers most services provided in building the property up to the point of completion. Materials qualify when provided with the services that install them into the property. The builder pays VAT at 20% on the materials they purchase, reclaims the VAT and then charges the customer 0% VAT on their services. Certain services do not qualify for zero rating such as hiring goods and architect fees.

When a property is converted to a residential dwelling, or there is a change to the number of dwellings in a property, the building work may qualify for a reduced rate of VAT of 5%. This also applies where a property has been unoccupied for two years. The reduced rate covers work carried out to the fabric of the dwelling, but not costs such as fitted furniture, carpets, equipment hire or professional services.

Property developers reclaim the VAT incurred on building residential properties, therefore HMRC offer VAT refunds to those building or converting their own homes to create a level playing field. The DIY reclaim can only be used for VAT correctly charged – it is important to get this right with the builder. The reclaim must be submitted to HMRC within three months of completion of the building work or it will be rejected. HMRC no longer accept the completion certificate as the date of completion of the property if it was substantially complete (and occupied) prior to its issue and the terms of the planning consent are vital as certain restrictions can cause HMRC to reject the claim.

With such variance in VAT rates and relief on residential property, it continues to be a very complex area.