The most common misunderstanding about VAT,  renovations and conversions is when you can get the 5% VAT rate for good and materials, so I thought that I’d try to clear up the confusion.  As I’ve explained below, there is a very important distinction depending on whether you buy goods directly from a retailer or if the goods are supplied and installed by a VAT registered contractor.

The basic rule is:

  • If you’re only buying goods and/or materials, the retailer has to charge 20% VAT.  That’s it.  And no, you can’t claim the difference between 20% VAT and 5% VAT from HMRC. 
  • If you buy the goods and/or materials from a contractor who also installs the goods, he can charge 5% for the services and the goods.

The reason for this is that under the VAT law,  the 5% rate only applies to services supplied in the course of qualifying renovations or restorations AND GOODS SUPPLIED IN CONNECTION WITH THOSE SERVICES.

Here are a couple of examples of how this all works with a boiler, though the same principles apply to other stuff, such as new doors, decorating materials, a new bathroom suite.

If you buy the goods directly from a retailer, then you have to pay VAT@20%

If you buy the boiler directly from a supplier and install it yourself or have a contractor install it: If you by a boiler from a builders merchant and install it yourself or engage a plumber to install it, you have to pay 20% VAT on the boiler.  If the contractor installs it, then he can charge the 5% rate for his services.

Contractor supplies and installs: If you have a VAT registered plumber/contractor who sells and installs the boiler then the services and the boiler and other materials used are eligible for the 5% rate.

So ultimately, it depends on whether you buy the boiler directly from a retailer or other supplier, or if you buy the boiler from a contractor who installs it for you.

Unfortunately there’s no simple formula to work this out, because each case is different and depends on a range of factors, including much  mark-up the contractor adds to the cost of any goods and of course whether or not the contractor is registered for VAT.

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Here’s an example of how it to calculate the potential cost and based on a typical situation involving the purchase of a boiler and installation:

Option: buying the goods directly

I buy the boiler directly from a retailer.  The best price I can get is net £1,800 including VAT @20%; i.e. £300.  The total cost of the boiler and installation is therefore:

  • Boiler: £1,500 plus VAT @20% = £300.  Total cost: £1,800
  • The cost of installation by a contractor who is not registered for VAT is £800.
  • If the contractor is registered for VAT, then the cost is as follows:

Total cost: Boiler: £1,800 + installation £800 = £2,600.

  • If the contractor is registered for VAT, then the cost is as follows:

Boiler: £1,800

Installation £800 + VAT@5%: £40

Total cost: £1800 + £840 = £2640.

.Option B: VAT registered contractor supplies and installs the boiler

I engage a VAT registered contractor to supply and install the boiler.  He may or may not get a better price from the supplier, but he will charge me full retail for the boiler.  He can claim the VAT charged by the supplier on the purchase of the boiler.

Net boiler price: £1,500.

Installation: £800 for the installation.:

  • Net boiler price: £1,500
  • Installation: £800

Total net price: £2300 @ 5% VAT = £115

Total: £2,415

The difference is that in Option 2, the contractor only has to charge VAT at 5% on the price for the boiler because he buys and installs.

Of course, this example only considers one piece of expenditure, but there can be significant savings by engaging a single contractor to do the whole renovation at 5% VAT.  So remember, if you buy goods yourself, you will pay VAT @20% and can’t claim any VAT relief on them at all.

HMRC’s guidance about this subject is in VAT Notice 708: Buildings and construction, sections 7 and 8: which explain how the 5% rate applies to conversions and renovations.  You can find more information about this in my book “VAT for DIY property developers” which was specially written for those of you who are renovating, converting or building your own home.  You can buy it from Amazon for just £17 or as a pdf from our shop for just £10.95.


November, 2018



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