As I act on behalf of a number of property developers and investors, they often ask me what rate of VAT applies to development works and if it is recoverable ...
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.
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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.
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- 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.
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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.
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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.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.