This is the second of two articles about VAT and residential property. The first article looked at the question we are sometimes asked, “I’m VAT registered, so if I build my own house, can I just put the invoices through my business VAT returns?”
This second article looks at whether you should charge (or be charged) VAT on the work done in building a dwelling.
The concept of “Supply”
“Supply” is central to understanding VAT. Different rules apply depending on the type of supply:
- Sale of a dwelling – always zero-rate.
- Letting a dwelling – always exempt.
- Work done on a dwelling – depends on the circumstances
- Materials supplied for construction etc – depends on the circumstances
The sale of a residential dwelling is a zero-rated supply. Generally speaking, this means you can reclaim VAT on the costs of creating this dwelling. The letting of a dwelling is not a zero-rated supply, but an exempt supply. Generally speaking, you cannot reclaim VAT on your costs if the supply you make is an exempt supply.
(Consider a housing developer who, unable to sell the houses, rents them out. VAT which was previously reclaimed can be clawed back by HMRC, although not necessarily all at once.)
Work done on a dwelling, and the VAT rule
The catch-all rule is that work done to a property, and materials used, are VAT-able at the standard rate. Then there are some exceptions:
1. Work done constructing and selling a new dwelling is zero-rated. (Notice 708 para 3.1.1) If you are the person selling the dwelling, the sale is zero-rate, you can reclaim most input tax from your purchases.
2. Work done converting an unused non-residential building to a dwelling is zero-rated (Notice 708 para 5.1.1). The importance of this is because in other cases, work done on a non-residential building would be VAT-able (Notice 708 para 2.1).
3. Work done converting a former residence that has not been lived in for 10 years. This is zero-rated and treated in the same way as converting a non-residential building to a dwelling (Notice 708 para 5.1.1). The importance of this is that any work done on a residence in other circumstances is normally VAT-able at 20% . You cannot reclaim VAT on building an extension to an existing (old) residence.
4. Work done converting an existing dwelling into other dwelling(s). (For example, sub-dividing a flat.) This is VAT-able at 5% (Notice 708 para 7.1.1).
5. Renovation work or alterations done on a dwelling that has not been lived in for the last two years is charged at 5% VAT (Notice 708 para 8.1.1).
What is a “Dwelling”?
It must be self-contained living accommodation, with no direct internal access to another dwelling, with no planning or other restrictions to prevent it being used as a dwelling, or being sold as a separate dwelling. It must be constructed in accordance with planning permission. (Notice 708 para 14.2.1) This suggests that failure to adhere to the planning permission could result in losing your entitlement to reclaim VAT on building / conversion costs.
Note that a “relevant residential purpose” relates to institutional residences like care homes, and is not dealt with here.
This article is for interest only – if you are undertaking any project like those described above, the sums involved might be substantial, and you should do your own research and seek professional advice.