Firstly, to start with a common misconception, the 5% VAT rule does not mean that you can reclaim 15% VAT.
Let’s start at the beginning and explain where the 5% VAT rate comes into play.
You can utilise the 5% or reduced VAT rate in two situations:
- The conversion of premises to a different residential use
- The renovation or alteration of an empty residential property
The eligibility criteria are covered below in more detail however they can be found in full in section 7 and 8 of VAT Notice 708 Buildings and Construction.
If you fall within the criteria then you need to ask, before making payment, to your builders and other contractors, who are VAT registered, to invoice you using the reduced rate of VAT i.e. 5% VAT rate rather than 20%.
They will or may ask you the customer or client to provide a VAT Certificate. There is no specific version available, however, in VAT Notice 708 there are some examples in paragraph Section 18. This will be created by you and then provided to your contractors.
They will invoice you and charge you 5% VAT rather than 20%. You will pay their bill and this will have reduced your refurbishment costs by 15%.
There is no ability to claim the 15% back. However, if you have not finished a project then ensure any final invoices are corrected.
If you have recently finished a project where the reduced rate could have been applied you could request a credit note and for the contractor to re-invoice you with the new VAT Rate. They would then need to refund you 15%. I would note this may not always be practical.
The key time where the reduced VAT rate becomes useful for most property investors is when they are converting a property from use to another. For example, a single dwelling is being converted into a multiple dwelling property (a HMO). The complete information can be found in VAT Notice 708 Buildings and Construction which can be useful to get an understanding of the detail.
The first point to note is that this only applies if you are using a VAT registered contractor, otherwise it is irrelevant.
The basic conditions are:
- A qualifying conversion is carried out
- Provide a Valid Certificate
- The services being provided by the contractor are qualifying services
The qualifying services are as follows:
EXTRACT FROM HMRC VAT NOTICE 708 Construction and Buildings:
Reduced rate services
Other than installing goods that are building materials (see paragraph 13.8 for examples of building materials), you can also reduce rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the building.
You can also reduce rate works within the immediate site of the premises being converted that are in connection with the:
- means of providing water, power, heat or access
- means of providing drainage or security
- provision of means of waste disposal
All other services are standard-rated. For example, you must standard rate:
- the installation of goods that are not building materials, such as carpets and fitted bedroom furniture
- the erection and dismantling of scaffolding
- the hire of goods
- the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors
You can reduce rate the:
- conversion of an outbuilding into a garage
- construction of a new detached garage
- construction of a drive serving the garage
This is provided both these conditions are met:
- the garage is intended to be occupied with the ‘single household dwelling’, ‘multiple occupation dwelling’, or the premises intended for use solely for a ‘relevant residential purpose’ resulting from the qualifying conversion
- the work is carried out at the same time as the qualifying conversion
But you cannot reduce rate the provision of a hardstanding (ground surfaced with a hard material for parking vehicles on) unless it is also used as an access.
You can only reduce rate those services we have discussed when they’re supplied in the course of a qualifying conversion. If your services cover a wider range of work then you may apportion your charge on a fair and reasonable basis. If you decide not to make an apportionment then none of your work can be reduced-rated.
Remember to check whether you can request your contractor to invoice you with the reduced rate of VAT before you make payment. It can be more difficult when payment has already been made.
If you think you have an eligible conversion and want clarification or want some advice on what you need to do to utilise the reduced rate of VAT, please get in touch.
January 20th, 2020