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When to use 5% VAT on developments

5% VAT rate

One question I am often asked is should are development be 20% or 5% VAT. This page will aim to answer those questions. This informations is correct to the best of my knowledge at the time of posting (October 2019), but VAT regulations can alter at any time.

The lower rate of 5% applies to the following works:

  • renovating residential property that has been empty for more than two years
  • where there is a change in the number of dwellings, for example, converting a house into flats
  • converting a commercial building into residential use, for example, a barn or office conversion
  • converting a single household residence into an HMO (house of multiple occupation)

The 5% rate applies to building services and related materials via a VAT registered builder, but not to separately purchased building materials. So for example, you would still pay 20% if you went to the local DIY shed. So popping down to B&Q to purchase a tin of paint will incur 20% VAT. But if your builder did it you would pay 5% on this invoice and he would then reclaim the remainder.

Proof that the 5% VAT rate applies

In order to apply the 5% rate to building works, the supplier will need to obtain proof that they have applied the 5% rate correctly. In most cases, however, a certificate is not required, but in order to keep HMRC happy evidence to support the application of the lower rate is required.
 

Where a property that has been empty for more than two years, council tax records should be used to support the application of the 5% rate, as well as confirmation from the local authority ‘Empty Properties’ officer where they have one. You might also look at other proof such as the last resident moving into a nursing home or the owner dieing. Maybe his or she moved abroad and left the house empty. The more proof you can obtain the better.

Where you are dealing with a ‘change in the number of dwellings’ or a conversion from commercial to residential use or into an HMO then copies of the planning permission and the architect’s plans should suffice.

What happens if the builder insists on charging 20% VAT?

If your builder refuses to charge the lower rate of VAT and insists on 20% you can refer the contractor to the relevant section of Notice 708; section 7 about conversions and section 8 about renovations/refurbishments to make sure that he can see the information clearly explained by HMRC. You might also consider a letter from a tax expert informing him of the VAT regulations or find a new builder that will apply the rate correctly.

 
 

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