It’s well known that, in the UK, construction work associated with a new build is not subject to VAT whilst construction work associated with an existing building (whether refurbishing or extending) is.
However, the VAT landscape in construction is a little more nuanced and two of our recent projects have provided great learning with regards to making VAT savings. The following is a short summary of those two projects in the context of VAT in construction.
Renovation of empty houses
1. Renovation of empty houses/uninhabited properties are entitiled to the reduced rate of 5% VAT
Our client purchased a flat in a mansion block in Marylebone, London. Prior to the purchase, the flat had been vacant for a period of just over two years.
- The above rule only applies to residential properties that have been vacant for at least 2 years prior to acquisition.
- The property must be vacant continuously in that period and up to the start of works on site.
- There must be evidence (circumstantial evidence is rarely sufficient). In the case of this project our client obtained utility bills showing zero usage and local authority bills.
- The discounted 5% VAT rate is applied to all fixed items. Other, non-fixed items (which include built in wardrobes unfortunately) are at the regular 20% rate of VAT.
- Consultant fees associated with the project are also at full 20% VAT.
This property was purchased by our client in probate. It hadn’t been modernised in over 40 years and had also been vacant for 2 years prior to aquisition.
Our client employed a VAT specialist pre-construction to collate all of the necessary evidence, to define the type of relief, list the applicable tests and match the scheme. During construction their role was to identify which items were subject to the full 20% rate and which items fell under the reduced 5% rate. Our monthly certificates for work carried out by the contractor were passed on to the VAT specialist who advised on the level of VAT to be applied (a blend of 20% and 5% according to items certified).
On a build where the construction contract totalled £750K exclusive of VAT and the vast majority of the works were subject to the reduced 5% rate our client saved in excess of £100K on VAT.
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Conversions of property
2. Conversions of property are rated at 5% VAT
Our client purchased a mid terraced property in Clerkenwell, London. The property included an (A1) café occupying ground and lower ground floors and a single family dwelling on first, second and third floors. We obtained planning permission to extend the property to the rear at first and third floors and to convert the single family dwelling to 3 flats (one per floor).
- The above only applies to residential properties. It permits increase as well as decrease. Examples where this applies include:
- House → Flats (as in the above scheme)
- Flats → House
- HMO → Single House
- Office → Residential (for example under PD)
- The 5% rate only applies to works ‘necessary for the conversion’.
As in the above case, we advised our client to employ a VAT specialist pre-construction, otherwise known as the ‘eligibility phase’ where the proposal and the evidence is assessed in order to establish the appropriate rate of VAT. The consultant carries on during construction, or the ‘apportionment phase’ where they analyse certified costs and advise the contractor as to the correct VAT rates to apply to their invoices.
The construction cost for the Clerkenwell Road conversion totalled £500K exclusive of VAT. Once again, the vast majority of works fell under the reduced 5% VAT rate and our client made savings in the order of £70K on VAT.
Conversion from a single dwelling to 3 studio flats at Clerkenwell Road. Completed November 2019.
Frequently Asked Questions
Do I have to pay VAT on a new build house?
No, you do not. New build construction is zero-rated. This means that a VAT registered contractor must not charge VAT on any associated labour or material costs.
To qualify as a ‘new build’, your building must be completely built from scratch. It must be a self contained building and have no doors or connections to an existing building; it has to be able to be used independantly and sold separately.
There there will be VAT due on consultants fees such as Architects, Structural Engineers etc (if they are a VAT registered company).