Reduced-rate VAT on building services when converting premises to a different residential use
If you have ever looked in to the rules surrounding reduced- or zero-rate VAT and the building and construction industry (if you haven’t then it is an excellent way of spending a Saturday afternoon), you will have no doubt noticed that it is a veritable rabbit hole of specific situations, qualifying conditions, requirements and exclusions. Therefore I have taken it upon myself to allay some of this complexity by presenting some of the facts in as simple a format as possible.
Now I couldn’t possibly cover all scenarios in just one blog, as not only would the resulting document be capable of putting even the most steadfast of insomniacs in to a deep sleep, it would also be so long that by the time I’d finished writing it HMRC would almost certainly have changed some of the rules that I covered at the beginning. Therefore I will focus on just one scenario, and that is where a premises is being converted to a different residential use, which I hope is relevant to some of you, our dear readers.
For those that aren’t aware, it may be possible to charge VAT at the reduced rate of 5 per cent (as opposed to the usual 20%) on the supply of services, and potentially goods, related to the conversion of an existing premises to a different residential use. A residential use is broadly defined as one of the following:
- a ‘single household dwelling’
- a different number of ‘single household dwellings’
- a ‘multiple occupancy dwelling’ e.g. bed-sits
- a premises intended for use solely for a ‘relevant residential purpose’ e.g. a home providing residential accommodation for children, a home providing residential accommodation with personal care for persons in need of personal care due to old age, disablement etc. (the full list can be found under section 14.6 on this web page)
To be able to claim the reduced-rate VAT on the supply of services, three basic conditions must be met, which are:
- The works must constitute a qualifying conversion.
- Where necessary, a valid certificate is held.
- The services are qualifying services.
There are further rules and caveats within each of the three conditions, which I shall expand upon below.
- A qualifying conversion
As a general rule of thumb, if the number of dwellings within a premises and/or the type of dwelling is the same after conversion as it was before, then that conversion will not be a qualifying one (as summarised in the following table).
|Dwelling(s)||Single household dwelling(s) after conversion||Multiple occupancy dwelling(s) after conversion||Relevant residential purpose building after conversion|
|Single household dwelling(s) before conversion||Not normally qualifying conversion unless the number of single dwelling households changes||Qualifying conversion subject to further conditions||Qualifying conversion subject to further conditions|
|Multiple occupancy dwelling(s) before conversion||Qualifying conversion subject to further conditions||Not a qualifying conversion||Qualifying conversion subject to further conditions|
|Relevant residential purpose before conversion||Qualifying conversion subject to further conditions||Qualifying conversion subject to further conditions||Not a qualifying conversion|
|Any premises not listed above before conversion||Qualifying conversion subject to further conditions||Qualifying conversion subject to further conditions||Qualifying conversion subject to further conditions|
As per the table, even if a premises is being converted from one type of dwelling to another (e.g. single household dwelling to a multiple occupancy dwelling), there are further conditions that need to be met. These can be found within sections 7.3 to 7.5 on this web page.
- Where necessary, a valid certificate is held
It is only required that a valid certificate be held if, after conversion, the building will be used solely for a ‘relevant residential purpose’ or ‘relevant charitable purpose’. Therefore if the resulting premises will contain one or more single household dwellings or multiple occupancy dwellings, then you do not need to obtain a certificate.
A certificate must be issued by the customer to the supplier of the services before the supply is made. Whilst it is the customer’s responsibility to issue the certificate, the supplier of the services must then take all reasonable steps to check the validity of the certificate.
If you are either a customer who is unsure about how to issue a certificate, or you are a supplier and have received a certificate but are uncertain of its validity, then we would be happy to help.
- The services are qualifying services
If the service being provided is related to works of repair, maintenance (such as redecoration) or improvement (e.g. construction of an extension or the installation of double glazing) to the fabric of the building, then there is a good chance that it can reduced-rated. However as usual there are exceptions to this rule.
If the service relates to the installation of goods that are not building materials, for example carpets or fitted bedroom furniture, then it must have normal VAT (20%) applied. This is also the case for the erection and dismantling of scaffolding, the hire of goods, landscaping and the provision of professional services. For full details of which services qualify and which don’t, please see section 7.6 of this web page.
To summarise, if a supplier is providing a qualifying service for a qualifying conversion, they can apply the reduced-rate VAT of 5% to the invoices that they issue to the customer. For example, if a builder was contracted to convert one large premises in to a number of smaller flats, they would be able to apply the 5% VAT rate to their invoices.
As always, the information provided in this blog should not be taken as guaranteed advice as it is written from a general point of view. Therefore if you are a supplier of building or construction services and you think that a project you have been contracted to work on is classed as a qualifying conversion, we would be happy to help by carrying out an analysis of your specific situation and providing our professional opinion.
Written by Simon Whitehead