Applying 5% rather than 20% VAT can dramatically reduce the construction budget for a range of residential conversion and renovation projects.
The conversion of a non-residential building into a house or flats will usually qualify for the 5% VAT rate. For example, if an office building is converted into a house at a cost of £800,000, the VAT charged would be reduced from £160,000 to just £40,000.
Property conversions that change the number of dwellings should also see the 5% rate able to be applied – converting flats into one house, or a single property into multiple apartments, would both be examples of this. In addition to this, a residential building that has been empty for two or more years will also qualify for the reduced rate for most renovation and alteration works.
Contractors aware of this valuable VAT relief can use it to gain an advantage when tendering for new work, with competitors concerned about applying it correctly or, in some cases, being completely unaware of the relief despite their eligibility.
The reduced rate not only covers a wide range of residential construction services, but also most building materials supplied by the contractor. Whereas if the customer sources the material themselves they will have to pay the 20% VAT rate. If the contractor sources them, 5% VAT will apply in most cases.
Furthermore, there are VAT advantages for do-it-yourself builders that could be significant. The VAT DIY scheme puts them in broadly the same position as a developer, as long as they are building a new home or converting a non-residential building into a dwelling. It means they can recover much of the VAT they incur on construction and conversion costs. However, it is important to consider the timing of these claims, as they must be submitted within three months of completion.
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HMRC scrutinise claims very carefully. If you are a contractor, developer or a DIY builder, Magma can advise on how to provide the correct evidence to support your claim and how you can benefit from the valuable VAT reliefs that are available for residential construction projects. Get in touch with a member of our Tax team below to find out more.
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