One area that causes confusion for contractors continues to be in what circumstances they should charge the reduced VAT rate of 5%. As such, many err on the side of caution and charge the full 20%.
However, if VAT is charged at the wrong rate, this will lead to increased costs to investors that are unable to recover the VAT and may also lead to issues with HMRC. So this is a brief guide to the circumstances in which the reduced rate may and may not be applicable.
When can the 5% rate apply?
The 5% rate for construction services can apply in the following cases:
Conversion of a nonresidential building such as an office or warehouse to flats.
Conversion of a house where additional dwellings are created. For example, the conversion of one residential property into two flats.
Conversions of multiple occupancy dwellings. For instance, bed-sits converted back into one house.
If a residential property has been unoccupied for more than two years.
It is a prerequisite, in all scenarios, that the works are carried out in accordance with any necessary planning permission. Building control approval must also be obtained where appropriate.
The 5% rate does not apply ...
To the construction of new residential properties, where the zero rate applies.
In all other cases where the standard rate applies, such as:
the refurbishment of existing residential premises, where the use remains the same after the works, say where there is one house before and after the works; and
all works to commercial properties, apart from those outlined in this blog post.
What is covered by the 5% rate?
The 5% rate covers construction services in converting a building as well as any materials that are used, incorporated or installed in a building. This will cover changes relating to:
The fabric of the building - walls, roof, floors, stairs, doors, windows, plumbing and wiring.
The provision of facilities within the immediate site - water, power, heat, drainage, access, security, waste disposal.
The installation of items such as sanitary-ware, central heating, light fittings, a door entry system and fitted kitchen units.
When to charge at the standard rate ...
Some services will remain chargeable to VAT at 20% because HMRC does not consider them to be construction services when they are supplied directly to the client.
This includes costs such as the services of consultants (architects, quantity surveyors and project managers) and the hire of equipment, machinery and scaffolding. However, HMRC accepts that a reduced rate will apply if these services are provided by the contractor as part of qualifying construction services.
There are some building materials that HMRC consider are not ordinarily incorporated by builders in residential buildings, and therefore supply and installation must be standard-rated even within a project that qualifies for the reduced rate.
These goods include:
freestanding and integrated appliances
built-in speakers, TV, audio and video equipment
fitted furniture, wardrobes
carpets, curtains and blinds
There are many problem areas and HMRC guidance is continually being updated by case law; therefore professional advice should always be sought when considering VAT and property together.
"Would you like to know more?"
If you are a property developer or investor and would like clarification on when to charge the reduced rate of VAT, do give me a call on 0333 335 0427 or click here to ping me an email and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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