If you’re planning on carrying out property renovations or converting a building from commercial into residential use (or vice versa) in the near future, there is a good chance you may be able to claim by VAT.
It all depends on who you’re getting to complete your building work and whether or not you’re doing the work yourself. If you are embarking on the work DIY style, then it’s worth looking into whether or not you would save more money by being registered as a Development Company.
Why you may be able to do this as a developer and not as a landlord is because property development is viewed as a trade in tax terms, while property investment i.e. renting out a buy to let, isn’t. As a result, the latter is VAT exempt.
Employing a builder to do the work
If you do go ahead and hire a builder to do the bulk of the renovations, then under HMRC’s VAT Notice 708 Buildings & Construction it’s possible you may only be charged the reduced VAT rate of 5%. Make sure that the builder buys all the necessary materials (if you bought them yourself you would be charged 20% VAT).
The types of buildings that would be eligible for the 5% VAT rate include a single house, a number of different houses and a house where there are many residents, for example, a House of Multiple Occupancy (HMO). The way this works is the builder (who must be VAT registered) reclaims VAT, then adds it to your bill at a rate of 5%.
Other areas of construction you can reduce VAT on include:
- Labour involved in building the property;
- Utility charges e.g. putting in heating, water, electricity etc;
- Energy efficient materials;
- Security and drainage;
- Converting an existing building into a garage;
- Building a driveway to that garage.
Areas where VAT would be charged at the standard 20%:
- Paying architects and surveyors fees;
- Installing non-building material goods, such as carpets and bookcases in a study;
- Hiring a skip or special tools;
- Erecting and dismantling scaffolding;
- Landscaping activities.
Doing the work on a DIY basis
Choosing to carry out the work yourself, on the other hand, means you wouldn’t be able to take advantage of the 5% VAT reduced rate. However, if you are VAT registered by becoming a Development Company, then you would be legally entitled to claim back all of the VAT.
If, once converted, you then sell the property to another company (which rents out properties), then this would be regarded as a VAT Zero Rated transaction. Meanwhile, you can’t charge VAT to tenants, so no need to worry about future VAT bills.
Zero Rated VAT would also apply to property investors when they purchase a brand new building from a property developer, or convert existing commercial premises into residential.
The above can become very confusing and it’s always a good idea to check with a qualified accountant who specialises in property development and investment, and will happily spend a good few hours going over any questions you might have regarding VAT Notice 708.