How to save VAT on DIY residential property development
Doing any type of property development is expensive. The usual rule of thumb seems to be that it will always cost you at least double your initial estimate. And you should then add VAT at 20% to the whole amount. However, there are three ways to save VAT on DIY property developments and if you’re doing a new build or conversion or renovation, you may be able to save VAT in at least one of them.
- Buying commercial property for conversion VAT free
If you’re buying commercial property to convert to residential for personal or family use, the vendor may have “opted to tax” the property. This normally means he has to charge VAT on rental income or the sale of the property, but you can’t claim this VAT from HMRC. However, you can prevent the vendor charging VAT by issuing the VAT1614D certificate to the vendor before the price is legally fixed, which requires the vendor to sell the property VAT exempt. This means that you save 20% on the purchase of the property, which is probably the most largest saving you can make.
- Saving VAT on costs if the zero-rate or 5% reduced rate applies;
The zero-rate applies to construction of new dwellings. The reduced rate of 5% applies to building services in the course of certain qualifying conversions and renovations.
The zero-rate and reduced rate normally also apply to “building materials” supplied by the contractor in the course of those building services. See my recent blog VAT and building materials which explains the meaning of the term.
These VAT reliefs only apply in specific situations, so make sure that you’ve checked the rules in VAT Notice 708, Buildings and construction http://tinyurl.com/mod94mc to make sure that your development qualifies. Most contractors will have experience with these rules so should be able to help with this process.
- Claiming VAT under the DIY VAT refund scheme.
The DIY refund scheme applies if you’re building your own home or converting a property to create a new dwelling. If you’re building a new home, you can claim VAT on “building materials” that you buy direct. If you’re doing a conversion, you can normally claim VAT on “building materials” that you buy plus VAT on your contractor’s services. You need to be a bit careful when budgeting for conversions because there are different definitions of the word “conversion” for reduced rate construction services and for the purposes of the DIY refund scheme.
If you’re doing normal repairs, maintenance, extensions or renovating your existing home, then chances are that you won’t be able to benefit from any of the three ways to save VAT on DIY property development.
Finally, remember that the VAT reliefs only apply in limited circumstances, so make sure that your development qualifies before finalizing your budget. It’s better to over-budget for VAT rather than having to put a hold on construction work while you try to find the cash to pay unexpected VAT bills.
Marie
January, 2017