Reduced Rate VAT Construction Services

It is fairly well known that the reduced rate of VAT (5%) applies to a variety of construction works. However, it is often difficult to determine the correct VAT rate applicable. An approach taken by some is to apply the standard 20% rate to all supplies. However, this can lead to queries from customers who cannot recover VAT they are charged, and those who are denied recovery by HMRC as it has been improperly charged. It may also result in your quote being unnecessarily uncompetitive in the market.

Which Works Qualify for the Reduced Rate of VAT?

Conversion Services

You may be able to reduce rate the supply of certain construction services if you are involved in the conversion of:

  • A non-residential building into a building that is ‘designed as a dwelling or number of dwellings’, or
  • An existing residential property into a
  • different number of ‘dwellings’.

Common examples of non-residential conversions include redundant barns, office blocks and empty public houses, etc. A building contractor may reduce rate most of its services in relation to a qualifying conversion, but care should be taken not to extend the relief to works which do not qualify, such as the creation of a ‘granny-annexe’.

An existing residential property that is converted into a number of flats or bed-sits may obtain relief, but care should be taken to ensure the dwelling conditions are met. Reduced rating may also be applied where two or more residential properties are amalgamated into a single household dwelling.

The conversion of qualifying non-residential and existing residential properties into a ‘relevant residential purpose’ building (such as a care home or a monastery) may also qualify for reduced rating if a certificate is provided by the customer – it is recommended that professional advice is obtained before accepting such a certificate.

Renovations & Alterations

A slightly less well known relief is available for work on an eligible ‘dwelling’ or premises intended for relevant residential use that has not been lived in during the two years immediately before work starts.

This is useful for individuals and landlords buying dilapidated properties to help minimise their refurbishment costs. It may even be possible for the premises to become occupied once the work commences and still benefit from the relief for up to a further one year.

It is recommended that evidence that the property has been empty is obtained from the customer. The best form of evidence includes electoral roll and council tax records or a letter from the local authority.

Energy Saving Materials

The supply and installation of specified energy saving products (including solar panels, wind turbines and wood-fuelled boilers etc.) in residential property can be reduced rated. In addition, qualifying grant-funded heating and security equipment, and certain mobility aids supplied to people over 60 years of age can be charged to the customer at the reduced rate.

Dwelling Definition

A building is ‘designed as a dwelling or a number of dwellings’ where the building contains a dwelling or more than one dwelling and in relation to each dwelling the following conditions are satisfied:

  • The dwelling consists of self-contained living accommodation;
  • There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
  • The separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
  • The separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
  • Finally, statutory planning consent has been granted in
  • respect of that dwelling and its and its construction or
  • conversion has been carried out in accordance with that
  • consent.

This article is based on general principles; you should always seek specific professional advice based on the fact pattern of your project.

If you would like to discuss cloud accounting and Making Tax Digital with us in more detail or if you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

This article featured in issue 12 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters – Issue 12