When does the 5% VAT rate on building works apply?

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Andrew Needham highlights some practical issues on the availability of the 5% VAT rate.

A lower VAT rate of 5% applies to certain building works; but when does it apply, and what documents will the developer and builder require?

The 5% rate

The 5% rate applies to the following:

  • Renovating residential property that has been empty for more than two years
  • Where there is a change in the number of dwellings
  • Converting a commercial building into residential use
  • Conversion into a house of multiple occupation (HMO)
  • Conversions to relevant residential buildings, for example old people’s homes, children’s homes 

The 5% rate applies to building services and related materials supplied by the building contractor but not to separately purchased building materials, for example, purchases from builders’ merchants. 

The different categories of work have different rules and requirements for the application of the 5% VAT rate, and the supplier will need to obtain proof that they have applied the 5% rate correctly. In most cases, a certificate is not required, but evidence to support the application of the lower rate is required.

Empty property for more than two years

HMRC will require proof that the property has been empty for more than two years. HMRC recommend that the builder obtains proof from the ‘empty properties’ officer of the Local Authority; however, many Local Authorities don’t have an empty properties officer. Alternatively, copies of the council tax records or the electoral roll showing that the property has not been occupied for more than two years is acceptable evidence.

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Change in the number of dwellings

The rules in this area appear simple at first glance but are complex and cause a lot of confusion. In the simplest scenario, you have a house consisting of two flats and you convert it into one house – a change in the number of dwellings from two to one, so the 5% rate applies. 

However, if you have a three-storey block of flats containing three flats – one flat on each floor – and you change it to five flats, two on the ground floor, two on the first floor and one on the second floor – the 5% rate only applies to the works on the ground and first floors, as you have to look at the project on a floor-by-floor basis, so the work to the second floor will be subject to 20% VAT.

Commercial into residential use

Simple examples of a commercial building being converted into residential use would be a barn conversion or an office being converted into flats. HMRC have accepted that where you have a residential property that is converted into commercial use and is then subsequently converted back into residential use, it qualifies for the reduced rate of 5%.

Conversions to an HMO

The 5% rate would apply to the conversion of any property into an HMO. So, the 5% rate would apply to converting a commercial property, a single household dwelling or a relevant residential building into an HMO.  

Conversion into ‘relevant residential’ buildings

The conversion into a ‘relevant residential’ building can be either from a non-residential building or from another type of residential property, for example, a house. 

A certificate is required for the application of the 5% rate for the renovation of a relevant residential building that has been empty for more than two years or conversion of a property into a relevant residential building. Even if the supplier obtains a certificate, HMRC say that a supplier must also take all reasonable steps to check the validity of the certificate. 

Practical point  

In all cases, in order to substantiate the application of the 5% VAT rate, the contractor should retain copies of the planning permission and the architect’s plans showing the work being carried out, in addition to the other information.