Please note This is a very simple summary touching on some of the VAT implications for self builds, conversions and alterations to residential property. It is not by any means a bible on the subject, but I can help with more detail if required.
Zero Rating
Where you have bought a piece of land with the intention of having a new house built on it VAT will not usually be chargeable on construction costs and materials. This is because the builder can charge VAT at the zero rate on these services.
This would include typical situations like buying a bungalow, demolishing it and rebuilding a house on the site or converting a commercial building or a barn into a new home. Zero rating can also apply to approved alterations to listed buildings where listed building consent has been obtained.
Zero rating will not apply if you intend to build a new house which isn’t capable of being sold in its own right. So, if you are converting an outbuilding into a dwelling for a member of your family but the planning permission does not allow the “new dwelling” to be sold separately from the main property then zero rating will not apply and your builder will have to charge VAT at the full rate.
It is important to note that even where zero rating does apply it is pretty much limited to the labour supplied and materials used in the construction of or included in the fabric of the building and each case and the apportionment of the zero rating allowance to materials used and works done needs to be carefully considered.
Professional Services supplied in respect of architects, design consultants and project management fees are not capable of attracting the zero rate on their own but the VAT you incur on these could be mitigated in a couple of ways if you approach things in the right way from the outset.
One way to eliminate the VAT on these professional services is to get your builder to engage these professionals for you and provide the services directly. The builder can recharge you for these costs under a single lump sum contract known as a “design and build contract”. If that is not possible and you want a more hands on approach then you can set up your own company to do that for you. Your company will contract to provide design and build services to you at cost engaging the builder and the professional advisers and so long as that company is VAT registered, it can charge you VAT at the zero rate and recover the Vat on the professional aspects neutralising the VAT costs.
Reclaiming VAT
If you are doing the build yourself, so long as you are creating new dwellings capable of being sold in your own right and you are not building or converting with the intention of selling or letting the property (at least in the foreseeable term, you are not barred from future sales) then you can reclaim the VAT on the cost of materials you have bought yourself from suppliers.
Again there are materials which qualify and some that don’t but any good VAT adviser can manage this for you and agree the amount you can reclaim with HMRC.
Reduced 5% Rate
There are also some things which can qualify for a reduced rate of VAT (5%) such as converting a house into self-contained flats or bedsits or going the other way and converting flats back into a single dwelling. The 5% rate can also apply to the refurbishment of properties which have not been lived in for at least 2 years.
Extensions and Granny Annexes
But what about things like Granny annexes or extensions?
This is where planning permission is so important. Generally speaking an extension is highly likely to give rise to an irrecoverable VAT cost as in order to reclaim your VAT or qualify for zero rating the key is whether the works create a brand new dwelling which is capable of being sold independently from the main dwelling or building.
If VAT costs are high (20% often is no small sum) and you are planning a Granny Annex then not only does it need its own self-contained status BUT you also need your planning permission to be granted on the basis that you could sell the Annex separately without you having to sell your house or the main building and therefore attention to this element needs to be given at the outset.
Advice
It really doesn’t hurt to have someone look over the tax aspects of a build project for you. It could lead to savings and will certainly help you properly plan project costs.
Anecdotally, a friend of mine was getting ceramic tiles fitted in the kitchen and bathrooms and wood floors throughout the rest of the house fitted by her new build developer all to be fitted for her before she moved in and supplied with the house. The Developer called these “extras” and the sales rep produced an invoice which attempted to charge her VAT on these items a not inconsiderable VAT cost of £1900. A letter later and she was refunded that £1900 which goes to show sometimes it is useful to have someone in the know at hand!
