Avoid the VAT issues for new dwellings on farms


The shortage of affordable properties in many rural areas, means more farming businesses are looking at building new properties or converting buildings to provide accommodation for family members or workers. But what about the VAT issues that can arise?

Generally, construction works to buildings are standard rated (20%), however, where strict conditions are met, VAT legislation provides some specific beneficial VAT reliefs for certain qualifying works to dwellings including:

  • Zero-rating (0%) for construction of new build dwellings
  • Reduced rating (5%) for conversion of non-residential buildings to dwellings
  • Reduced rating (5%) for renovation or alteration of homes unoccupied for two or more years

Where zero-rating or reduced rating applies VAT relief is obtained via the builder charging VAT at 0% or 5% rather than at 20%.  

If you are not charged VAT at 20% by a builder who is constructing a new dwelling/converting a non-residential building to dwellings on the farm etc, this not only improves your cashflow where the VAT charged is recoverable i.e. where the works are in the course of a taxable activity but can provide a 15%/20% VAT saving on qualifying works where the VAT incurred is normally irrecoverable i.e. where the dwelling is to be used for exempt rental/private purposes.

The above reliefs can therefore provide a significant benefit for works on constructing and converting new dwellings.

Whilst the VAT reliefs are intended to encourage and support the construction, conversion and renovation of dwellings, many builders are unfortunately unaware of the VAT relief rules and what qualifies, thereby either failing to apply the VAT reliefs where applicable or incorrectly applying the VAT reliefs too broadly and having to seek additional VAT from customers following a HMRC challenge. Where VAT has been incorrectly charged on construction work undertaken, recourse is back to the builder to correct the VAT position, and not to HMRC for VAT recovery.

There is significant complexity in the rules for qualifying for the above VAT reliefs, where what may appear subtle differences can mean the difference between qualifying for the VAT relief and not qualifying. In addition, there are complexities with whether any VAT chargeable may be recoverable through a business’s VAT returns (or alternatively through a DIY Housebuilder Scheme refund claim for works for a private non-business purpose).

It is essential to take specialist VAT advice at an early stage of the project to ensure you pay the correct VAT and also to optimise the reclaim of any VAT incurred. Please contact 0808 144 5575 or email help@armtrongwatson.co.uk for more information.

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