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While construction work is generally standard rated by default, under certain circumstances the construction or renovation/conversion of a property can be subject to preferential VAT treatment. It is the latter of these scenarios that will be the focus of this article.
Note that a ‘building’ can also include ‘part of a building’ and that the services of architects, surveyors, etc, are always standard rated.
All references are to Value Added Tax Act 1994 (VATA 1994) unless otherwise stated.
A ‘conversion’ takes place where the new building incorporates part of a pre-existing building, as opposed to ‘construction’ where the new building is built without using any above-foundation part of a pre-existing building. The main exception to this is where party walls (as per Notice 708, section 3.2.3) or a single/corner façade (as per s3.2.4) are retained, neither of which would generally prevent the work from being treated as construction.
Residential conversions
Where a ‘qualifying conversion’ is carried out, the reduced rate of VAT can be applied to the supplies, provided they are of ‘qualifying services’ (Sch. 7A, Grp. 6).
A supply of qualifying services is defined by Note 11. This is broadly work to the fabric of the building, as well as certain services to the site in general relating to water/power/heat and similar. The supply of ‘building materials’ (see below) by the person carrying out the qualifying services can also be reduced-rated, provided they are incorporated into the building.
For a qualifying conversion to take place it must be:
(1) a changed number of single household dwellings conversion;
(2) a house in multiple occupation conversion; or
(3) a special residential conversion.
A ‘single household dwelling’ is defined in Note 4(1) as a dwelling designed for occupation by a single household, with a ‘multiple occupancy dwelling’ defined in Note 4(2) as a dwelling designed for occupation by multiple households (such as a bedsit). In each case the dwelling must also consist of:
(1) self-contained accommodation;
(2) with no internal access to another dwelling; and
(3) the use and disposal of which is not prohibited by planning consent or similar provisions.
Changed number of dwellings
A changed number of dwellings conversion occurs where, after conversion, the number of single household dwellings differs from the number which existed before the conversion. There must also be at least one dwelling after conversion and no part of the premises can contain the same number before and after.
Example
Annette works on a building containing six apartments over three floors. She removes several walls and the end result is that there are now three apartments. The number of dwellings has changed and is still at least one, therefore this is a qualifying conversion.
Multiple occupancy conversion
A multiple occupancy conversion is similar, except there must only be multiple occupancy dwellings after the conversion and there cannot have been any prior to the conversion. Further, no part of the premises after the conversion can be used for a relevant residential purpose (see below).
Example
Benedict works on a small warehouse and converts it into two bedsits. There were no multiple occupancy dwellings before the conversion but there are two after, therefore there has been a qualifying conversion.
Special residential conversion
A special residential conversion takes place where the building is intended to be used solely for a relevant residential purpose following the conversion and was not used for such a purpose prior to the conversion.
A relevant residential purpose is defined within Note 6 and includes a home for children, accommodation for certain people needing personal care, or a hospice. Where the relevant residential purpose is ‘institutional’ (as defined by Note 7(7)), the premises after the conversion must represent the entirety of an institution.
For a special residential conversion, the supply can only be reduced rated if it is made to a person who intends to use the premises for the relevant residential purpose.
Example
Chloe buys a factory and engages a builder to convert it into a care home for people recovering from drug dependencies, which Chloe will operate. This would be a qualifying special residential conversion.
The builder will expect Chloe to provide them with a certificate to confirm the intended relevant residential use; the certificates can be found in HMRC notice 708, section 18.
Renovations of empty buildings
Another supply which attracts the reduced rate of VAT is qualifying services relating to certain properties which have not been lived in for at least two years, as per Sch. 7A, Grp. 7. Note 5 sets out what constitutes qualifying services, being functionally identical to Note 11 under the residential conversions heading above.
To qualify, the property must either be a dwelling or, when last lived in, used for a relevant residential purpose and will be so used following the renovations (a certificate will again be needed). Provided the property has been empty for two years prior to work commencing, the reduced rate can apply.
Example
Diana buys a multiple occupancy dwelling which she is able to prove, using council tax records, has not been lived in for over two years. If a builder is used to renovate the property they will be able to charge the reduced rate of VAT, provided no-one moves in before the work commences.
For a single household dwelling only, it is possible for the owner to have already moved in when work begins, provided the conditions in Note 3(3) are met.
Conversions for housing associations
While the above supplies ‘merely’ attract the reduced rate of VAT, there is one conversion which can be zero-rated for VAT (as per Sch. 8, Grp. 5).
For this to apply, a non-residential building must be converted into a building designed as a dwelling, or for use solely for a relevant residential purpose, with the supply being made to a relevant housing association (as defined by Note 21). Any building materials incorporated at the same time will similarly be zero-rated.
For these purposes, a non-residential building is defined in Note 7A and can include a building designed/adapted as a dwelling, or for a relevant residential purpose, which has not been used as such for the 10 years preceding the start of the conversion work.
Where the property will be used for a relevant residential purpose, the customer will again need to provide a certificate confirming their intentions.
Note that subcontractors cannot benefit from Group 5, as they will be supplying their services to the contractor, not to the relevant housing association.
Building materials
As noted above, items incorporated into a building will generally follow the VAT treatment of the underlying service being provided. However, this is only true where the items are ‘building materials’ as defined in Sch. 8, Grp. 5, Note 22 and 23 and Notice 708, section 13.
If an item does not qualify as building materials then VAT must be charged at the standard rate on the item (where the main supply is zero-rated) or on the item and the cost of incorporating it (where the main supply is reduced-rated).
Conclusion
This can often be a tricky area of VAT, in particular where the entirety of a building is being worked on but only part of it is being converted. Further details on the above can be found in VAT Notice 708.
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