Reduced Rate VAT Construction Services
It is fairly well known that the reduced rate of VAT (5%) applies to a variety of construction works. However, it is often difficult to determine the correct VAT rate applicable. An approach taken by some is to apply the standard 20% rate to all supplies. However, this can lead to queries from customers who cannot recover the VAT they are charged, and those who are denied recovery by HMRC as it has been improperly charged. It may also result in your quote being unnecessarily uncompetitive in the market.
Which works qualify for the reduced rate of VAT?
You may be able to reduce the rate the supply of certain construction services if you are involved in the conversion of:
- A non-residential building into a building that is ‘designed as a dwelling or number of dwellings’, or
- An existing residential property into a
- different number of ‘dwellings’.
Common examples of non-residential conversions include redundant barns, office blocks and empty public houses, etc. A building contractor may reduce the rate on most of its services in relation to a qualifying conversion. However, care should be taken not to extend the relief to works which do not qualify, such as the creation of a ‘granny-annexe’.
An existing residential property that is converted into a number of flats or bed-sits may obtain relief, but care should be taken to ensure the dwelling conditions are met. Reduced rating may also be applied where two or more residential properties are amalgamated into a single household dwelling.
The conversion of qualifying non-residential and existing residential properties into a ‘relevant residential purpose’ building (such as a care home or a monastery) may also qualify for reduced rating if a certificate is provided by the customer. It is recommended that professional advice is obtained before accepting such a certificate.
Renovations and alterations
A slightly less well-known relief is available for work on an eligible ‘dwelling’ or premises intended for relevant residential use that has not been lived in during the two years immediately before work starts.
This is useful for individuals and landlords buying dilapidated properties to help minimise their refurbishment costs. It may even be possible for the premises to become occupied once the work commences and still benefit from the relief for up to a further one year.
It is recommended that evidence that the property has been empty is obtained from the customer. The best form of evidence includes electoral roll and council tax records or a letter from the local authority.
Energy saving materials
The supply and installation of specified energy saving products (including solar panels, wind turbines and wood-fuelled boilers etc.) in residential property can be reduced-rated. In addition, qualifying grant-funded heating and security equipment, and certain mobility aids supplied to people over 60 years of age can be charged to the customer at the reduced rate.
This article featured in issue 12 of our construction and real estate newsletter series.Read Real Estate Matters Issue 12
This article is based on general principles; you should always seek specific professional advice based on the fact pattern of your project. If you have VAT or other tax queries you would like to discuss, please get in touch with a member of our tax team on 01903 234094.