When can you save VAT on conversions and renovations?
I’ve had a number of queries about VAT and property conversions and renovations recently – i.e. dwellings and certain other residential/charitable use properties. You can save a lot of money if you understand how the VAT rules work, so that you know when a contractor can charge the 5% rate instead of 20%.
HMRC’s guidance about the subject is in VAT Notice 708: buildings and construction, section 8: http://tinyurl.com/pv9wvxh. However I thought it would help to address three specific issues about the reduced rate that seem to get people particularly confused.
So how do I get the 5% VAT rate on goods and materials?
Unfortunately, you don’t. The 5% rate ONLY applies if you buy goods and services at the same time. The way the law works is that the 5% applies to building services in the course of renovations or restorations, but it also applies to goods supplied by the contractor in the course of those building services.
What does this mean? Suppose you employ a VAT registered contractor to supply and fit a new boiler, then the contractor can charge 5% for both his labour and the new boiler.
However, if you buy a boiler direct from a builders’ merchant or other supplier to take advantage of a discount and engage the VAT registered contractor to install the boiler, then you have to pay 20% on the boiler, although the contractor can charge 5% for his services.
There’s no easy way to work out which way is cheaper because it depends on all sorts of things, such as whether the contractor passes on any discount or adds a mark-up if he supplies the boiler as well as installing it. Of course the easiest way to save on VAT is to employ contractors who aren’t registered for VAT, but in that case, you’ll pay VAT at 20% on good and materials which you buy direct.
Generally speaking, the higher the cost and proportion of the goods and material to the labour costs, the more you’ll save by using the supply and install approach. But the only way you can work this out is to do your own calculations to find out which saves more VAT.
Can’t I claim this VAT from HMRC?
Not normally. Unfortunately, if all you are doing is renovating an existing property so that it can be used for its’ original purpose, then there is no way you can claim any VAT. But this issue comes up time and time again from both people renovating and converting to sell or lease on the one hand and people renovating for personal or family use on the other. This is why:
Renovating for sale or lease
If you’re planning to sell or lease the property, then this would normally be regarded as a business activity. Under the normal VAT rules, you can’t claim VAT on work done on existing residential properties because the sales price or rent is exempt from VAT.
In certain LIMITED cases, if your restoration involves changing the number of residential properties – e.g. self-contained dwellings – in a property, then you may be able to claim some of the VAT if you register for VAT. That’s because some or all of the restoration is carried out in the course of a conversion. If you sell the freehold or lease over 21 years (20 in Scotland) of additional self-contained dwellings, your sale may be zero-rated, not exempt from VAT. That means that you can claim VAT on related costs.
However you can only claim VAT that’s correctly charged. So if your contractor has charged 20% VAT for work that should be reduced rated, you must ask the contractor to refund the difference. HMRC WILL NOT REFUND VAT THAT HAS BEEN OVER-CHARGED.
Renovations of homes for personal or family use
The VAT “DIY” home converter’s scheme that allows “self-build” developers – i.e. those developing dwellings for personal or family use to claim VAT on certain goods and services. Unfortunately, these schemes don’t normally apply to renovations, unless the project involves creating dwellings from non-residential properties OR the renovation of a dwelling that has been unoccupied for 10 years or longer.
For example, suppose you buy an old house that was converted into flats 20 years ago and has been unoccupied for 3 years. You renovate the property and return it to the original single house, so you’ve changed the number of dwellings in the property. In this situation, the construction work will probably qualify for the reduced rate of 5%, either as a conversion to change the number of dwellings in the property, or a renovation under the 2 year unoccupied rule. However, that doesn’t mean that you can claim VAT on the costs. I’d strongly recommend that you check the rules carefully to make sure that you qualify for a refund and contact HMRC or take advice if you’re in any doubt. I have seen many situations over the years where people have assumed that they will be able to claim VAT on their costs, only to find out right at the end that they can’t and end up with an unanticipated VAT bill.
And finally: what if the supplier insists on charging 20% on a supply and fit that should be at 5%?
So you’re in a shop looking for various fittings for the house – perhaps window frames or doors and you ask about their supply and installation cost. You explain that it’s a renovation so please can you have the 5% rate, but neither the shop assistant or floor manager has heard of the 5% rate.
Unfortunately, this is still quite a common scenario, despite the fact that the reduced rate has applied for over 10 years now. A lot of contractors will only charge the 5% rate if they are satisfied that it’s correct and that they won’t end up having to foot the bill if HMRC disagrees.
Thankfully, the information about the reduced rate is readily available on HMRC’s website. The subject is explained in VAT Notice 708: buildings and construction: http://tinyurl.com/pv9wvxh. Section 8 of the Notice explains when the reduced rate applies to renovations and alterations, so you can refer the retailer/contractor to this if they aren’t aware of the 5% rate or don’t agree. Their accountant should be able to confirm the issue for them.
Nowadays, a lot of contracts for such work will list the work that is liable for the reduced rate. I’d also suggest including some provisions in case HMRC dispute the liability at a later date, to ensure that you and the contractor agree how to cover the cost of any undercharged VAT.
If you understand how the rules work and when the 5% rate applies, you can make some very significant savings, so take the time to look at HMRC’s guidance before you start spending money.