VAT and property conversion
Inns & outs

VAT Treatment for Construction, Renovation, and Conversion Projects

While construction work typically defaults to the standard VAT rate, certain property construction, renovation, or conversion projects may qualify for preferential VAT treatment. This article focuses on those specific scenarios.

It’s important to note that a ‘building’ can refer to an entire structure or just a part of it, though services provided by architects, surveyors, and similar professionals are always standard-rated.

Under the Value Added Tax Act 1994 (VATA 1994), a ‘conversion’ involves incorporating parts of an existing building into the new structure. In contrast, ‘construction’ entails creating a new building without using any above-foundation part of a prior structure. However, exceptions exist for retaining party walls (as per Notice 708, section 3.2.3) or a single/corner façade (as per s3.2.4), which would not generally affect the classification as construction.

VAT on Residential Conversions

For a ‘qualifying conversion’, a reduced VAT rate can apply to eligible supplies, provided they consist of ‘qualifying services’ as outlined in Schedule 7A, Group 6. According to Note 11, qualifying services generally cover work on the building’s structure and specific site services related to utilities such as water, power, and heat. Additionally, ‘building materials’ supplied by the person providing qualifying services can also receive the reduced rate, if incorporated into the building.

A conversion qualifies if it involves:

1. Changing the number of single household dwellings,
2. Converting a building into a house in multiple occupation, or
3. A special residential conversion.

A ‘single household dwelling’ is defined in Note 4(1) as accommodation intended for a single household, whereas a ‘multiple occupancy dwelling’ under Note 4(2) is designed for multiple households, like bedsits. In both cases, the dwelling must:

1. Be self-contained,
2. Lack internal access to other dwellings, and
3. Have unrestricted use and disposal, not limited by planning consent or similar restrictions.

Conversion with Changed Number of Dwellings

A conversion qualifies as a changed number of dwellings when, after the work, the number of single household dwellings differs from what was present before. The conversion must result in at least one dwelling, and no area within the premises should retain the same number of dwellings as it had prior to the conversion.

Example

An individual undertakes work on a building with six apartments spread over three floors. By removing several walls, they reduce the number of apartments to three. Since the number of dwellings has changed and there is still at least one dwelling, this qualifies as a qualifying conversion.

Multiple Occupancy Conversion

A multiple occupancy conversion occurs when, after the conversion, the property contains only multiple occupancy dwellings, with none existing beforehand. Additionally, no part of the premises after the conversion can serve a relevant residential purpose.

Example

An individual converts a small warehouse into two bedsits. Since there were no multiple occupancy dwellings before, but two after, this qualifies as a qualifying conversion.

Special Residential Conversion

A special residential conversion occurs when a building is converted to be used exclusively for a relevant residential purpose and was not previously used in this way. Defined in Note 6, relevant residential purposes include facilities such as homes for children, accommodations for those requiring personal care, or hospices. If the residential purpose is considered ‘institutional’ (per Note 7(7)), the converted premises must encompass the entire institution.

To qualify for the reduced rate on this type of conversion, the supply must be made to a person who intends to use the premises specifically for the relevant residential purpose.

Example

An individual purchases a factory and hires a builder to convert it into a care home for individuals recovering from drug dependencies, which the individual will manage. This qualifies as a special residential conversion.

The builder will require a certificate from the individual confirming the intended relevant residential use; these certificates are available in HMRC Notice 708, section 18.

Renovations of Vacant Buildings

The reduced VAT rate also applies to qualifying services for properties that have been unoccupied for at least two years, in accordance with Schedule 7A, Group 7. Qualifying services are defined similarly to those under Note 11 for residential conversions.

To qualify, the property must be either a dwelling or previously used for a relevant residential purpose, with the same intended use after renovation. A certificate confirming this use is required. As long as the property has been empty for two years before work begins, the reduced VAT rate is applicable.

Example

An individual purchases a multiple occupancy property and can verify through council tax records that it has been unoccupied for over two years. If a builder is hired to renovate the property, they can apply the reduced VAT rate, provided no one moves in before the renovations start.

For single household dwellings only, it is permissible for the owner to have moved in prior to the work beginning, as long as the conditions in Note 3(3) are satisfied.

Conversions for Housing Associations

Unlike other supplies that qualify for a reduced VAT rate, certain conversions can qualify for zero-rated VAT (under Schedule 8, Group 5). This applies when a non-residential building is converted into a dwelling or is intended solely for a relevant residential purpose, provided the supply is made to a relevant housing association (defined in Note 21). Building materials used during this conversion are also eligible for zero-rating.

A non-residential building, as specified in Note 7A, includes structures designed or adapted for residential purposes but unused as such for the last 10 years before conversion work begins. If the building will serve a relevant residential purpose, a certificate from the customer is required to confirm their intended use.

Subcontractors do not qualify for zero-rating under Group 5, as they supply their services to the primary contractor rather than directly to the housing association.

Building Materials

Items incorporated into a building typically adopt the same VAT treatment as the main service provided, but only if they qualify as ‘building materials’ under Schedule 8, Group 5, Notes 22 and 23, and Notice 708, section 13.

If an item does not meet the definition of building materials, standard VAT must be applied—either to the item alone (if the main service is zero-rated) or to both the item and its incorporation costs (if the main service is reduced-rated).

Conclusion

VAT in this area can be complex, especially when work involves an entire building but only part of it is being converted. For more in-depth information on these points, refer to VAT Notice 708.

Simplify VAT Complexities with a Free Consultation at Naail & Co

For expert guidance on navigating the complexities of VAT for construction, renovation, and conversions, get in touch with Naail & Co – Chartered Certified Accountants. Our experienced team can help clarify how VAT rules apply to your specific project and ensure compliance with current regulations. Book a free initial consultation to discuss your needs and get tailored advice on this intricate area. Contact Naail & Co today to start simplifying your VAT planning and management.