The 5% reduced rate — when it applies and what qualifying conversion works are
The 5% reduced rate applies under VATA 1994 Schedule 8 Group 5 to: (1) conversion of non-residential buildings (offices, shops, warehouses, pubs, agricultural buildings, places of worship) to residential use; (2) changing the number of dwellings in a building (house to flats; flats to house); and (3) renovation of dwellings unoccupied for 2+ years. The rate is charged by VAT-registered contractors on qualifying construction services. The client should provide a written certificate confirming the qualifying nature of the works.
Zero-rating for the first grant of a major interest in a converted dwelling
The first grant of a major interest (freehold or lease over 21 years) in a substantially converted non-residential building is zero-rated. Zero-rated supplies are taxable (input VAT recoverable) but at 0% rate — unlike exempt supplies (no input VAT recovery). Developers who convert and sell zero-rated units can recover input VAT on conversion costs. Subsequent lettings on ASTs are exempt.
The DIY Converters Scheme (VAT431C) — reclaiming VAT on self-conversion
Individuals (not companies) who convert non-residential buildings into dwellings for their own occupation can reclaim VAT on materials using HMRC form VAT431C. The claim covers materials incorporated into the building (not professional fees, plant hire, or contractor labour). One claim, made after practical completion and before occupation, within 3 months of the completion certificate.
The option to tax and residential property — when it matters for landlords
Residential property supplies are always VAT exempt — the option to tax cannot apply to residential use. Landlords making only exempt AST supplies cannot recover input VAT on letting costs. Where a landlord acquires an optioned commercial property for residential conversion, VAT at 20% is charged on the purchase price; if the landlord then makes zero-rated first grants, input VAT on the purchase and conversion costs can be recovered. Complex transactions require specialist VAT advice before acquisition.