If you’re anything like me, you’ve spent years trying to decide whether it’s better to go with the experienced builder for your next project and accept the fact you’ll have a 20% VAT bill to deal with, or take the lower cost route of finding someone who isn’t VAT registered.
Obviously there is some overlap in these two choices. Plenty of contractors who fall under the VAT threshold are more than competent, and equally at the other end a large turnover doesn’t necessarily equate to a better service. But what if I told you that as investors, we can benefit from reduced VAT rates on many of our projects, including HMO conversions!
This isn’t anything new, but it might be the case that you don’t know what you don’t know, and if I can save one person money on their next conversion, it’s been worthwhile writing this post.
A lot of us will be familiar with 0% VAT rating on new build developments, as an example, but I’m going to share some detail on the situations that can benefit smaller investors as well. Like I say, this isn’t anything new. In fact it mainly stems from a single rather lengthy government notice – VAT Notice 708.
You can read the whole notice on the gov.uk website here – https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction#reduced-rating-the-conversion-of-premises-to-a-different-residential-use
You can also listen to a recent podcast with Simon Misiewicz from Optimise Accountants that inspired this post here – https://www.insidepropertyinvesting.com/update13/
New Build Developments
In most cases, if you are building a new residential dwelling from the ground up, your VAT bill will be reduced from 20% to 0% on all qualifying services (see below), In order to meet the criteria for 0% rating, the work either needs to be a complete new building, or an extension that creates a new dwelling in addition to what currently exists. So an extension to make an existing dwelling bigger wouldn’t count, for example.
The 0% rating doesn’t apply to commercial properties, however if you’re building a mix use development, you can apportion the total costs between the commercial and residential elements and still claim a 0% rating on the residential side.
Converting Residential Properties
Sadly, converting a single household dwelling into a single household dwelling doesn’t qualify for a reduced VAT rate, but as soon as we change the number or type of dwellings in a building, we can in a lot of cases qualify for a 75% reduction in our VAT bill from 20% down to 5%.
There are 3 scenarios under this part of the notice that I feel can benefit us hugely:
- Where we change the number of single household dwellings within a building – if we take a family home and title split it to create multiple flats for example, or take a block of flats and change the layout to turn it from 6 x 1 bedroom flats into 4 x 2 bedroom flats, we would qualify for the lower rate. So long as the number of dwellings at the end is different from the number at the start, you should qualify for the lower rate. It is worth noting though that the reduced rate is only applicable to costs involved in the creation/reduction of dwellings, so if you’re adding 1 extra flat and renovate the whole block at the same time, only the costs associated with the new flat will be reduced.
- Where we convert a single dwelling into an HMO, or vice versa – this will have the biggest impact for me as up until now I’ve been paying 20% VAT on our HMO conversion projects. It wasn’t until I did some digging and found section 7.4 of this notice that I realised I could have been paying 5% VAT on all of my previous projects.
- Where we convert a non-residential building into a dwelling – section 7.5 of the notice will be of particular interest to you if you’re working on a commercial to residential investment strategy, as it states that any building not last used for residential purposes will qualify for 5% VAT when being converted into a residential dwelling (this includes both single household dwellings and multiple occupancy dwellings).
Renovating Empty Residential Properties
The final piece of the VAT 708 notice that I found of interest was section 8 which covers the renovation or alteration of empty residential premises. Basically, if a residential dwelling has been vacant for the 2 years prior to work starting, then the VAT rate can once again be reduced from 20% to 5%. This is fantastic news for investors buying old, tired and abandoned properties as depending on when it was last lived in, you could save yourself a further 15% of the build cost (at least on any qualifying services – see below).
It’s worth noting that you may be requested to prove the property has been empty for the 2 years prior to work commencing, so holding on to things like council tax records will be helpful.
Qualifying Services
One thing to bear in mind when taking advantage of either a 0% or 5% VAT rate on your property investment projects is that the reduced rate is only applicable to what the government refer to as ‘qualifying services’. It’s not that complicated, but worth understanding so that you don’t make any mistakes.
Any work to repair, maintain or improve the fabric of the building qualifies for the reduced VAT rate. This includes work like building an extension, redecoration, installing new windows etc. You will also be able to pay the reduced rate on works within the immediate site of the building, including connecting up utilities, drainage etc. On qualifying services, the reduced VAT rate is applicable to both labour and materials.
The main services that aren’t included are those that don’t have a direct impact on the physical building, so things like architects fees, hiring machinery, landscaping the surrounding grounds, and installing goods that aren’t building materials (like carpets and furniture) don’t qualify.
In all cases, it’s worth checking with your accountant to determine whether or not your project qualifies for a VAT reduction, and if so, which services you can receive the reduction on.