Charging 5% VAT rate for the conversion of premises to a different residential use

This VAT rate is only applicable between the building contractor and the customer and not for goods supplied to the building contractor or direct to customers from ourselves. 

Please read the below article for further information:

Converting a property? Convert the VAT rate to 5% to make huge savings

The 5% reduced rate of VAT is available for a wide range of residential conversion and renovation projects, but it is often overlooked. Applying 5% rather than 20% VAT can dramatically reduce the construction budget.

The conversion of a non-residential building into a house or flats will usually qualify for the 5% VAT rate. For example, if an office building is converted into a house at a cost of £500,000, the VAT charged would be just £25,000 rather than £100,000.

The 5% rate also applies to conversions that change the number of dwellings, for example, converting flats into one house, or a single property into multiple apartments. Furthermore, if a residential building has been empty for two or more years, the 5% is also available for most renovation and alteration works.

“This is great news for anyone undertaking these kinds of projects,” says Robert Facer, a VAT expert at Moore Stephens. “The 5% VAT relief has been around for many years, but is still not widely known about. Contractors may be reluctant to apply 5% VAT in case it is challenged by the VAT inspector. However, contractors familiar with this valuable VAT relief often use it to gain a competitive advantage when tendering for new work. So it offers benefits for suppliers and consumers alike. Our team of VAT specialists advises contractors, developers and their customers on how to correctly apply the VAT rules.”

Not only does the reduced rate cover a wide range of residential construction services, it also covers most building materials supplied by the contractor. “If customers source materials themselves, they will pay the 20% VAT rate,” Robert says. “If the contractor sources them, 5% VAT will apply in most cases.” The services of architects and other professionals could also benefit from the reduced rate, if supplied as part of a design and build contract.

Do-it-yourself builders also have VAT advantages that should not be overlooked. The VAT DIY scheme puts them in broadly the same position as a developer, as long as they are building a new home or converting a non-residential building into a dwelling. It means they can recover much of the VAT they incur on construction and conversion costs. “The timing of these claims is crucial,” Robert warns, “as claims must be submitted within three months of completion. Furthermore, HMRC scrutinise claims very carefully, so providing the correct evidence to support the claim, and knowing what VAT to include, is vital.”

Whether you are a contractor, developer or a DIY builder, we will be happy to advise on how you can benefit from the valuable VAT reliefs that are available for residential construction projects. Please get in touch for a free initial consultation.

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“I recently received an email from a developer whose contractor was refusing to charge the 5% reduced VAT rate unless the developer had a letter from HMRC confirming that the 5% rate was correct. The developer asked, quite reasonably, how he could get such a letter.”

Unfortunately, that’s not how it works, because HMRC do not routinely issue letters to confirm the VAT liability of construction work. As I’ll explain below, every VAT registered business has to assess its’ own VAT liabilities and this means that they have to decide the correct rate of VAT.

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There are a number of things you can do:

Refer the contractor to the relevant section of Notice 708; section 7 about conversions and section 8 about renovations/refurbishments to make sure that he can see the information clearly explained by HMRC.

Ask if the contractor will agree if you get a letter/email from a VAT consultant giving an opinion about whether the 5% applies. You will almost certainly have to pay for this but it will probably still be less than 20% VAT on the contractor’s fee.

Deal with the issue in the contract; for example that you will pay the difference if HMRC rules that the 5% rate is wrong, or that you’ll split the difference, or maybe decide to appeal against HMRC’s decision.

At the end of the day, if all else fails, you can find a contractor who is willing to charge 5%. You may be able to contract some of the labour to a self-employed contractor who isn’t registered for VAT. You’re the customer; it’s your decision.