I’m very pleased to confirm that my latest e-book: VAT for SME residential property developers is now available. For just £19, the book was written with new and SME residential developers in mind; whether it’s your first development or you’ve done several over the past few years. It covers new construction, conversions and renovations, as well as a wide range of other issues. Find out more and how to buy your copy here.

VAT and residential property development
The book contains the important VAT rules you’ll need, explained in a practical way that focuses on the 3 main stages in any property development: what you’re creating and how the finished property will be used; when you can save VAT on contractors’ fees and how much VAT you can claim from HMRC. Unfortunately It’s never possible to explain this stuff “briefly”, but the book is designed to explain the rules in the context of typical property developments, so that you can follow the VAT issues right from the initial planning to completion.
The issue of VAT is particularly important because, under the normal VAT rules, sales of existing residential properties are VAT exempt, which normally means that the developer can’t claim VAT on related costs. This additional VAT cost increases the cost of residential conversions, particularly in comparison with new builds where the construction services and sales are normally zero-rated.
It is, however, possible to claim VAT on certain conversions, as explained in the book.* However the subject of conversions is still widely misunderstood, with even experienced developers paying too much VAT because they don’t understand the rules and/or how to apply them in practice.
*You can also find the rules in HMRC’s VAT Notice 708: Buildings and construction: http://tinyurl.com/mod94mc
VAT and non-residential conversions and claiming VAT on costs
The issue of conversions is important for two reasons: first, contractors’ services for certain conversions are liable to VAT at 5%; second, the sale of a newly converted property which create additional dwellings (and certain other residential properties) may be zero-rated. This is very important because it means that the developer can claim VAT on contractors’ fees and related costs. If the sale is exempt, then you can’t normally claim VAT on costs.
So what is a conversion, anyway?
There are different criteria for these 2 different uses of the word “conversion” – I’ve explained this in some detail in my book – see Chapters 2, 8 and 12. But the main principles are that the 5% rate applies to certain work if the result of the work is to change the number of dwellings in an existing property, while the zero-rate applies to the sale of a freehold or long lease in a “non-converted” residential, which means that you have to create additional dwellings in a non-residential property. The main principles sound very similar, but in practice the zero-rating relief is narrower than the reduced rate for conversion services. This means that even if your conversion qualifies for 5% conversion services, this DOES NOT NECESSARILY mean that the sale of the converted property is zero-rated.
And it is the second of those conversions – the zero-rated sales – that is the subject of this blog. The amounts of money involved in such conversions can be significant, with VAT bills easily running into 6 figure sums, especially if the developer has paid VAT on the purchase of commercial property. However developers sometimes think that being able to claim this VAT is a bit “too good to be true”! But it is and it’s not a scheme or a tax saving “structure” that has been devised to save VAT. The rule is valid and exists for a very good reason, as I’ve explained below.
Government incentives to encourage conversions
In 1995, the government introduced the zero-rate for the sale or long lease of dwellings which have been created by converting existing non-residential buildings; or “non-residential conversions”. This meant that developers could claim the VAT on costs, in certain cases, which put them on a similar playing field to new house builders.
In 2001, the government introduced various measures to encourage property developers to develop brown field sites, rather than eating into even more of the UK’s dwindling green field land. On the VAT side, this included a number of measures, including the introduction of the 5% reduced rate for contractor’s services of certain residential conversions and renovations, the latter in particular aimed at encouraging people to return unused dwellings to the housing stock.
The VAT 1614D mechanism
Even so, that still left the potential VAT cost of VAT on the purchase of commercial properties where the vendor had opted to tax. This would increase the initial cost of the property by 20%, with the additional burden of extra stamp duty land tax on the initial purchase. Therefore, the government introduced the VAT 1614 procedure, which enables both commercial developers and private individuals who buy a commercial property for conversion for personal use, to buy a commercial property VAT exempt.
It means that if you issue a VAT 1614D certificate to the vendor before the price for a property is legally fixed, then the vendor must sell the property VAT exempt.
Of course, this is a significant benefit for both business developers and private individuals who can’t claim VAT on their costs. Even if you’re eligible to claim VAT on costs under the DIY VAT refund scheme, the scheme DOES NOT INCLUDE VAT ON THE PURCHASE OF A PROPERTY. The VAT cost of pub conversions, barn conversions, office conversions etc reduced significantly as a result of this measure.
Implications of the VAT 1614 procedure on the property vendor
The VAT 1614 procedure is a very useful mechanism for the buyer, but what about the property vendor?
For businesses, the main implication of making exempt supplies – such as selling property – is that the vendor can’t normally claim VAT on related costs. In most cases, this would only be VAT on professional fees and other costs relating to the sale (subject to the vendor’s partial exemption method).
However, in some cases, the VAT cost could be much more significant, because of the effects of the VAT “capital goods scheme” (“CGS”). Under the CGS, property sellers making exempt sales may be required to repay some or all of the VAT paid on costs that fall within the CGS. This applies to many types of property expenditure of £250,000 or more in the preceding 10 years. This could include anything from freeholds or leaseholds to a wide range of construction services.

So what exactly IS a conversion then?
The CGS is a complicated scheme (see VAT Notice 706/2 http://tinyurl.com/pr5d3sy for more information about the scheme. But to put it in context, I’ve recently come across a situation where the potential VAT cost for a vendor in this situation would be approximately £150,000, because the vendor had recently paid VAT on the cost of a 150 year lease extension on the property. The purchaser wanted to buy the empty commercial building and convert it to dwellings, which would be sold as long leaseholds (99 years in this case).
The vendor would, of course, have to sell the property VAT exempt if the purchaser issued the VAT 1614, but told the purchaser that the “VAT” would be added to the sales price. A potential £900,000 purchase would increase to approximately £1,050,000. Because the additional charge is not actually VAT on the sales price, but merely to cover teh cost of the vendor’s CGS liability, the purchaser couldn’t claim any of this from HMRC.
What’s the alternative?
The purchaser’s other option was to NOT use the VAT 1614 procedure, so that the vendor sells the property as a taxable supply. In this case, the selling price would be £900,000 net plus £180,000 VAT.
Of course, this would generate some additional costs for the purchaser in addition to paying the VAT, including additional stamp duty and the cost of funding the £180,000 VAT. The developers assumed that they would have to bear the cost of the VAT – the development would still be profitable as long as the developers could reduce their costs to try and make up some of the additional VAT cost.
And this is why it helps to understand the rules about conversions…..
But in fact, because they would be selling long leaseholds in “non-residential conversions”, their sales would be zero-rated which means that they can claim the VAT on the purchase cost AND other related costs from HMRC. One of the directors had real problems believing this – in fact, to begin with, he wouldn’t believe that HMRC would repay such a large amount of VAT when there was no VAT on the sales. But, as I pointed out to him, it was no different to a house builder claiming large amounts of VAT on goods and services used in the construction of new houses or flats. If you put up a relatively modest sized 20 house development, that’s a lot of bricks and mortar and a lot of VAT to claim from HMRC.
But the whole purpose of this bit of the legislation is to give property converters the same sort of VAT benefits as for house builders. It doesn’t matter whether you’re converting a huge office block into flats, a warehouse into loft apartments or a pub into a house. The principle is the same. It’s simply a case of understanding how the rules work and ensuring that your development meets all of the criteria to qualify for zero-rated sales and HMRC must repay any properly claimed VAT.
Marie
June, 2017
Hello
I am converting a barn into a non commercial workshop and have added 9 dog kennels a feed store a wet room and a garden shed. This site did not need planning as the kennels are on the site of an old barn that was demolished years ago. The kennels etc are new build the barn has been updated.
We are not a business and hope to claim some VAT if not all back
Is this possible?
Hi Lorraine, unfortunately I don’t think that you’ll be able to claim any VAT for this work unless the dog kennels are for a business activity. In that case, you’d register for VAT and pay VAT on your income and claim VAT on related costs. Otherwise, you can’t claim any VAT from HMRC on the cost of such construction work. The only time you can claim VAT from HMRC as a private individual is if you’re building a new home or converting an existing commercial property into a new home. Hope this helps, Marie
Hi Marie
I am currently converting part of an old post office (commercial) into a 2 bedroom maisonette all planning agreed, what level of VAT exemption would this receive? Would this exemption also cover gas/electric connections?
Hi Karone, if you hire a VAT registered contractor(s) to do the work, then the conversion will probably qualify for the reduced rate of 5%. Have a look at VAT Notice 708, section 7.6 http://tinyurl.com/po66ewb which explains the type of services covered by the reduced rate. It covers a broad range of services and goods supplied and installed by the same contractor. You’ll see it also includes “means of providing water, power, heat or access” so that should cover your gas/electric connections. Section 7 of Notice 708 contains HMRC’s full guidance about the reduced rate for conversions so I’d suggest that you read the whole section to find out more about how and when the reduced rate applies. Hope this helps.
We purchased a vacant office building in December 2017. After securing planning to convert to 9 apartments, we have appointed a contractor to carry out the work. We are VAT registered and anticipate that the contractor will add 5% VAT onto their invoices. Once complete, we will be selling the units individually as long leaseholds. Since the sale of the units are zero rated, can we reclaim the 5%?
Hi Matthew, yes in principle you’re correct, if the “long leases” are over 21 years (20 years in Scotland). Remember to check the detaileed guidance in HMRC’s VAT Notice 708 or my book “VAT for residential propeperty developers”, available in pdf from the shop here and in paperback from Amazon. Make sure that the builder only charges 5% wherever possible as you can’t claim VAT charged at 20% if the reduced rate applies.
Hi Marie,
Our non-VAT registered company has just finished the conversion of a commercial property into a single residence and put the house up for sale. What form do we need to submit to HMRC to reclaim the VAT paid at 20% (reclaiming the difference to 5%)?
Hi Peter, unfortunately that’s not how the rules work. If you convert a non-residential building into a dwelling, you get the 5% “relief” on contractors’ services (and goods/materials used by the contractor in the course of those services) because the contractor charges 5% instead of 20%. If the contractor has charged 20%, then you need to ask them to issue a credit note for the invoices at 20% and issue new invoices charging VAT at 5%. See my article about Conversions, renovations and the 5% rate http://tinyurl.com/y69w8xbf, which explains this in more detail. You CANNOT CLAIM VAT CHARGED AT 20% IF THE CORRECT RATE WAS 5%.
Either way, the 5% only applies if certain criteria are met. The rules are explained in VAT Notice 708 Buildings and Construction http://tinyurl.com/pjryxe8, section 7 of which explains when contractors can charge 5% for conversion services.
If the result of your conversion is a “non-residential conversion” as discussed in this article, then the freehold sale or sale of a long lease may qualify as a zero-rated sale. In that case, you can claim the 5% VAT charged by contractors and VAT on other costs by registering for VAT and submitting a VAT return.
This is a complicated subject and if you’ve never been registered for VAT or done any type of residential conversion, I’d strongly recommend thaat you check out HMRC’s website and their guide to VAT registration http://tinyurl.com/ybqs7klu. If you want more practical information, please also check out my book “VAT for residential property developers” which you can buy as a pdf from our shop or in paperback from Amazon.
Hope this helps you get your VAT costs sorted out. Email me directly if you need any further help.
Hi Marie, we’re converting a barn into a house we will live in. Is my understanding correct that for relevant services, we should be charged 5% vat, and we can then claim this 5% back from HMRC (within the right timeframe and with the correct invoices etc.)? Many thanks
Hi Natalie, yes in principle the work probably qualifies for the 5% rate as a qualifying conversion. See VAT Notice 708, section 7 http://tinyurl.com/pv9wvxh for details of how the 5% rate works. You can claim the 5% VAT using the DIY homeconverters scheme by submitting form VAT435c with invoices within 3 months of completion. Here’s the link to the form and guidance notes: http://tinyurl.com/pt9ec7h. Marie
Hi Marie,
We are looking to purchase a commercial property as a going concern as it is currently let.
Once we convert it to dwellings will we be entitled to issue long leases at zero rated vat
Hi Dave, not quite sure what you’re asking here! If you convert a “non-residential” property into dwellings then sell the freehold or grant a lease over 21 years (20 in Scotland) then in principle your sale could be zero-rated. That normally means that you can register for VAT and claim the VAT on your costs. But it is a complicated subject and I’d strongly recommend that you do some more research into the subject before you proceed. YOu can check out the subject in HMRC VAT Notice 708: Buildings and construction, or buy my book “VAT for residential property developers” from Amazon or our shop. There is also a LOT of information about the subject on this website in the many articles about residential property development. Marie