Property Renovation VAT UK — 5% Reduced Rate, New Build Zero-Rating, and DIY Reclaim

The Standard Rate (20%) — Most Residential Repairs and Maintenance

The default VAT rate on construction, repair, and maintenance services in the UK is the standard rate of 20%. This applies in the following property contexts: (a) Routine repairs and maintenance on occupied residential property: replacing a boiler; redecorating; fixing a roof; replacing windows in an occupied dwelling; all attract VAT at 20% when carried out by a contractor (who charges VAT on their labour and materials); the landlord cannot recover this VAT (as a landlord's rental income is VAT-exempt in most cases — unless they have opted to tax for commercial property); (b) Most renovation works on commercial property: commercial property construction is generally standard-rated; the commercial landlord who has opted to tax can recover input VAT on the works; (c) Improvements to listed buildings: prior to 1 October 2012, approved alterations to listed buildings were zero-rated; Finance Act 2012 removed this zero-rating and alterations to listed buildings in England, Scotland, and Wales now attract VAT at 20%; certain alterations to protected structures in the Republic of Ireland and listed buildings in Northern Ireland may still attract zero-rating — take specialist advice; (d) Snagging and defect rectification on new builds: snag works carried out on a new dwelling after the first sale are standard-rated (the zero-rating for new builds applies to the construction itself, not subsequent rectification); (e) Extensions to existing dwellings: building an extension to an existing residential dwelling is standard-rated (20%) unless the extension creates an additional self-contained dwelling (in which case the new dwelling may qualify for zero-rating on the first grant).

• Routine residential repairs (boiler; redecoration; roof repairs; window replacement on occupied property): standard 20% VAT; landlord cannot recover this as rental income is VAT-exempt
• Commercial renovation with option to tax: commercial landlord who has opted to tax can recover input VAT at 20% on renovation works
• Listed building alterations: zero-rating removed from 1 October 2012 (FA 2012); all alterations to listed buildings in England, Scotland, and Wales now 20%
• Extensions to existing dwellings: standard-rated at 20% unless the extension creates a new self-contained dwelling
• Snagging and defect rectification post-completion: standard-rated; zero-rating does not extend to rectification works after the first sale of a new dwelling

The 5% Reduced Rate — Empty Dwellings and Conversions

Schedule 7A to VATA 1994 (Group 7) provides for a 5% reduced VAT rate on certain residential renovation and conversion works: (a) Renovation of dwellings empty for 2 or more years: where a dwelling has been empty for at least 2 years immediately before the renovation works commence, the renovation and alteration services attract VAT at 5%; the test is on the dwelling (not the landlord or the building as a whole) — a flat in a block that has been vacant for 2 years qualifies even if the rest of the block is occupied; HMRC requires evidence of the vacancy period — council tax single person discount records; council tax exemption records; empty property ratings; utility records; the 5% rate applies to the works themselves (contractor's services and incorporated materials); materials purchased separately by the owner for a DIY project attract the standard rate (20%) — not the 5% rate (the 5% applies only to contractor services); (b) Conversions that change the number of dwellings: the 5% rate also applies where the renovation works convert a building from one number of dwellings to a different number — for example, converting a house into flats (increasing the number of dwellings); converting two flats into one dwelling (reducing the number); or converting a non-residential building into dwellings (see also zero-rating below); examples of conversions qualifying for 5%: converting a 1-bed flat into a 2-bed flat (change in number of dwellings — yes, if the 2-bed was previously a 1-bed; no, if it remains one dwelling); converting a 6-bed house into 3 flats (3 separate dwellings from 1 — qualifies at 5%); converting a church to a dwelling (non-residential to residential — qualifies for 5%); (c) What the 5% rate covers: the reduced rate applies to the contractor's services (including materials incorporated in the building); it does not apply to professional fees (architect; structural engineer; project manager) which remain at 20%; it does not apply to materials purchased separately by the owner from a builders merchant (which remain at 20%); (d) Evidencing the vacancy: HMRC may request evidence of the 2-year vacancy on VAT inspection; landlords and developers should retain council tax records, utility disconnection notices, and any correspondence from the local authority regarding the property's empty status.

• 5% reduced rate: applies to renovation of dwellings empty for 2+ years and to conversions that change the number of dwellings in a building
• 2-year vacancy test: evidence required — council tax exemption records; empty property rating; utility records; tested at the point works commence
• Applies to contractor services: the 5% applies to the contractor's service (including incorporated materials); materials purchased separately by the owner from a builder's merchant remain at 20%
• Conversions changing number of dwellings: house to flats; flats to house; non-residential to residential all potentially qualify for 5%
• Professional fees remain at 20%: architect; structural engineer; project manager fees are always standard-rated regardless of the nature of the project

Zero-Rating — New Residential Dwellings and First Grant of Major Interest

Under VATA 1994 Schedule 8 Group 5, the construction of a new dwelling and the first grant of a major interest in a newly constructed dwelling are zero-rated for VAT purposes: (a) Zero-rating on construction services: where a VAT-registered builder constructs a new dwelling (not a conversion — a new build), the construction services attract VAT at 0%; this means the builder charges no VAT on the build cost; the builder recovers input VAT on materials, plant, subcontractors, and professional services purchased in connection with the new dwelling; in effect, the new dwelling is built 'VAT-free'; (b) Zero-rating on the first grant of a major interest: the developer who sells (or grants a lease of more than 21 years) a new dwelling for the first time makes a zero-rated supply; no VAT is charged on the sale price; the developer can recover all input VAT incurred in constructing the dwelling; subsequent sales of the dwelling (by the first purchaser or later owners) are outside the scope of VAT entirely (not zero-rated) — only the first grant by the developer is zero-rated; (c) Conversion of a non-residential building to dwellings: the first grant of a major interest in a dwelling created by the conversion of a building that had no prior residential use (e.g. a church; an office; a warehouse) is also zero-rated; the conversion works themselves are generally reduced-rated at 5% (see above); the combined effect is that the conversion project attracts 5% VAT on construction services and 0% on the sale of the completed units; (d) The 'substantially reconstructed' listed building: where a listed building is substantially reconstructed (so that at least one facade — front and back if on a corner — is retained), the first grant of a major interest can be zero-rated; this is a narrow relief that requires specialist VAT planning and HMRC clearance; (e) Social housing from housing associations: the first grant of a major interest in a new dwelling by a housing association that is a registered social landlord is zero-rated; the housing association can recover input VAT on the construction costs.

• New build zero-rating (Group 5): construction services for new dwellings are zero-rated; developer can recover all input VAT on construction costs
• First grant of major interest: the developer's first sale or long lease (21+ years) of a new dwelling is zero-rated; subsequent sales are outside scope
• Non-residential to residential conversion — first grant: the first sale of a dwelling created from a non-residential building (church; office; warehouse) is zero-rated; works are at 5%
• Substantially reconstructed listed buildings: first grant can be zero-rated where at least one facade is retained and the building is substantially reconstructed; specialist advice needed
• Only the first grant by the developer is zero-rated: private re-sales of new homes are outside the scope of VAT — not zero-rated

The DIY Housebuilder Scheme and the Capital Goods Scheme

Two further VAT mechanisms are critically important for property developers and renovation landlords: (a) The DIY Housebuilder Scheme (VATA 1994 s.35): a private individual who builds or converts a dwelling for their own occupation (not for sale or letting) can reclaim VAT paid on building materials and contractor services under the DIY Housebuilder Scheme; HMRC refunds the VAT on a single claim made within 6 months of the completion of the build or conversion (evidenced by the Building Completion Certificate or equivalent); the scheme is available for: (i) new self-builds; (ii) conversions of non-residential buildings (barn conversions; church conversions) to dwellings for private occupation; the scheme is not available for: extensions to existing dwellings; renovations of existing dwellings; projects intended for rental or sale; (b) Materials purchased by the self-builder: the VAT is charged at 20% by the builder's merchant; the DIY reclaim recovers this 20% VAT on eligible materials (but NOT the 5% contractor-rate — because the 5% applies to contractor services, and the DIY scheme applies where the owner buys materials directly); (c) The Capital Goods Scheme: the Capital Goods Scheme (CGS) under VATA 1994 s.47A applies to adjustments of input VAT on capital items over a period of years; for land and buildings, the CGS applies to any single capital item or set of items (with the same purpose) costing £250,000 or more (excluding VAT) where input VAT has been claimed; the adjustment period is 10 years (for land and buildings); if during the 10-year adjustment period the use of the building changes (e.g. from fully taxable holiday lets to partly exempt residential letting), the landlord must make an annual VAT adjustment reflecting the changed use; this can result in the landlord repaying a portion of the previously claimed input VAT to HMRC; (d) Practical implications of the CGS: property developers who claim significant input VAT on construction and then sell or let the property in a way that changes the VAT recovery position face CGS clawback; exits from trading (selling a property out of a VAT-registered business) within 10 years of claiming significant input VAT require careful planning to avoid unexpected CGS repayments.

• DIY Housebuilder Scheme (s.35): private individuals can reclaim VAT on new self-builds and non-residential conversions for own occupation; 6-month claim window from completion; not available for rental or sale projects
• DIY scheme covers materials at 20%: materials purchased at standard rate from builder's merchants are refundable; not the 5% contractor rate (which applies to services)
• Capital Goods Scheme: adjustments over 10 years where input VAT of £250,000+ was claimed on land and buildings; use-changes trigger annual adjustments and potential repayments
• CGS clawback risk: changing from standard-rated holiday lets to exempt residential lets within 10 years of claiming significant input VAT requires annual adjustments and may result in repayment
• Plan exits within the CGS period: selling or changing use within 10 years of claiming large input VAT requires advance CGS planning with a specialist VAT adviser

Frequently asked questions