Without doubt, one of the most confusing subjects in VAT is the 5% VAT rate and residential renovations. Every now and again, I get a sudden rush of queries from developers and private individuals about when they can claim the reduced rate of VAT and how they can claim any overcharged VAT. So I thought it was time for a reminder about the subject, explaining when the 5% rate applies and how to get it. I’ve also answered a few of the most common FAQs about the subject from property owners, both property developers and private individuals.
The 2 year rule
If you’re reading this blog, chances are that you know that the 5% rate applies to certain renovations of dwellings if the property has been unoccupied for 2 years or longer. HMRC’s guidance about this subject is in VAT Notice 708, section 8 http://tinyurl.com/pv9wvxh. Section 8.1.2 sets out the basic conditions that must be met to enable contractors to charge the reduced rate on their services.
| Condition | Description | Further Information |
|---|---|---|
| 1 | You renovate or alter ‘qualifying residential premises’. | paragraph 8.2 |
| 2 | The premises have not been lived in for two years or more. | paragraph 8.3 |
| 3 | Where necessary, you hold a valid certificate. | section 17 |
| 4 | Your services are ‘qualifying services’. | paragraph 8.4 |
So what does this mean in practice?
It means that if you employ a VAT registered contractor to carry out the renovation work, their work qualifies for the 5% if all of these conditions are met.
Buying direct can be more expensive because you have to pay 20% VAT
Seems simple enough, but this is where the confusion starts. Most of the queries I get come from people who’ve read this part of Notice 708 and then ask “so how do I get the 5% rate for my new windows/doors/materials that I’ve bought direct from the supplier. Does the supplier refund the difference or can I claim it from HMRC?
This is why it’s important to understand how the 5% rule works.
If you look at the list above, you’ll see the 4th condition reads: Your services are “qualifying services”; i.e. renovating the property.
This is what it means:
- The 5% rate applies to contractors’ services or services of installing goods by the suppliers, not the goods on their own.
- However building materials that are supplied and installed by the contractor/supplier in the course of the renovation services also qualify for the reduced rate. This includes basic building materials; bricks, mortar, wood, etc and other goods that are “building material”. It never includes carpets, most electrical and gas appliances and fitted furniture.
- The 5% rate does not apply to goods/materials bought directly, even if installed or used in the course of the renovation.
Let’s consider a typical scenario:
Example 1 Bathroom suite bought directly from retailer and installed by the contractor. In this case, the retailer charges 20% for the suite. The contractor can charge 5% for his services of installing the suite.
You CANNOT claim the VAT difference from HMRC. It doesn’t make any difference whether you’re converting to sell or converting for your private use.
Example 2 Bathroom suite bought directly from retailer and installed by retailer. In this case, the retailer can charge the 5% rate for both the suite and their services of installing the suite.
Example 3 The contractor purchases the bathroom suite from the retailer and installs it for you. In this case, the contractor can charge the 5% rate for both the suite and their services of installing the suite.
What if the contractor charges too much VAT?
There will, of course, be situations where the contractor charges the 20% VAT rate for labour and building materials that qualified for the reduced rate. For example, in Example 3 above, the contractor may charge 20% for both the suite and the labour to install the suite.
In these situations, you have to ask the contractor to refund the overcharged VAT. The contractor has to follow a procedure, starting with issuing a credit note and correcting the error on their VAT return. HMRC will then refund the overcharged VAT to the contractor. The contractor is then liable to repay the overcharged VAT to you.
HMRC DO NOT REFUND OVERCHARGED VAT TO CUSTOMERS.
That’s why it’s important that you understand how and when the 5% applies before you pay any bills from contractors/suppliers. You should also check the small print in the contract to ensure that the contractor follows the correct procedure to refund any overcharged VAT.
It’s a bit of a messy subject, because sometimes you can buy directly at a better price if you install the goods yourself. However, the additional VAT cost may wipe out any potential savings, so you have to do your calculations to see which is the most cost effective.
If you want more information about this subject, check out my book: VAT for DIY property developers written for those of you who are buying and renovating for your private use, or VAT for residential property developers and contractors for those of you developing as a business activity. Both are available from our shop (pdf version) or in paperback from Amazon.
Marie
November, 2017
Thank you for this detailed information, I am a home owner and I qualify for the reduced vat rate at 5% for renovation works. where do I get a certificate from? my local council are saying they hold no record in terms of council tax, which is normal as I was liable to pay council tax even when I didnt live in the property.
Thanks
P
Hi P, there’s no “certificate” as such, it’s simply a case of providing some sort of evidence that the property wasn’t occupied for the 2 year period before the renovation begins. VAT Notice 708, s8.3.2 says:
8.3.2 Proof that the premises has been empty for 2 years
If you reduced-rated your supply, you may be required to show that the building has not been lived in during the 2 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.
If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 2 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in, they should write with a best estimate. We may then call for other supporting evidence.
Hopefully you can find something among this list that will do the job.
Marie
Hi Marie – can you kindly clarify the situation in respect of the purchase price for building supplies.
My plumber is concerned that he will be charged VAT at the standard rate by his merchant/supplier when he buys the new boiler/radiators etc on my behalf – does he simply show the merchant the empty property proof that I provide to ensure that he is only charged 5%?
Understandably he doesn’t want to be charged 20% by his supplier and only recover 5% from me.
Any help much appreciated!
Well actually that is how the rules work. A retailer OR any body selling goods on their own ALWAYS has to charge 20% VAT. THE 5% VAT RATE 5% ONLY APPLIES TO THE SERVICES PROVIDED BY A CONTRACTOR AND ANY GOODS OR MATERIALS USED/INCORPORATED INTO THE PROPERTY BY THE CONTRACTOR IN THE COURSE OF THAT WORK.
This means that the contractor will be charged 20% by his supplier for the goods and will charge you 5% for their supply and installation. He can then claim the difference from HMRC on his VAT return.
It’s a very common area of confusion but hopefully that clarifies things for you. You can find more information about this specific issue and more about how the 5% rate applies to domestic renovations in my book “VAT for DIY property developers” which you can buy in pdf form from the website shop or in paperback from Amazon.
Hi Marie. We just bought our property. It was empty for 2 years prior to us purchasing it whilst the previous occupant moved into care and left it empty for 2 years before deciding to sell. We bought it roughly 2 weeks ago and have semi-moved in (living between there and parents’ homes). Are we still able to apply for the 5% VAT reduced rate?
Hi the main contractor has asked me a subcontract plumber to charge 5% vat on a complete refurbishment on a house should I charge the normal 20% and let him claim the vat back or can I invoice plus 5% vat HMRC won’t help they just steer me to guidance
Hi John- is anyone currently living in the property? If so, when did they move in and when did the contractor start his work?
This is one of those questions that sounds quite easy but in fact the answer depends on a number of issues. Give me as much info as possible and I’ll try to find the answer for you.
Regards
Marie