Property VAT is one of the most expensive and probably ignored costs when it comes to costing a refurbishment and general maintenance.
The fact that the majority of investors who operate it as a business via a limited company are under the VAT threshold, they would not be VAT registered and hence cannot reclaim it either.
Additionally:
From our personal experience, we haven’t known the scenarios ourselves when VAT can be minimised whilst the builders or tradesmen would stick to standard 20% charge.
So:
This post would probably help you think along the lines of how to pay the right VAT for some of your refurbishments and keep your costs down.
First things first though:
The Four Property VAT Options
- 20% Standard Rate
- 5% VAT Reduced Rate
- Zero VAT (0% rate)
- VAT Exempt
Note that once you have paid the VAT for any works done, it is a little hard to reclaim it back and in some scenarios impossible to reclaim.
i.e.
The decision on which type of VAT is applicable from the four options has to be understood well before invoice payment and probably right at the start of any kind of works.
The onus is on us as investors to review and drive which type of property VAT is applicable as part of the quotation process from tradesmen should the quotation not consider applicable options.
The Government Directive On Property VAT
It is evident that for a standard renovation of buy-to-let properties, a standard rate of 20% is applicable at the time of writing.
However:
If you are doing specific things as part of your renovation like a change of dwellings, building for a purpose, doing an exempt supply, there is money to save and reclaim.
One can’t be remembering all the rules and regulations applicable to review VAT on the invoices as an investor.
This section is just going to detail out an easy to remember thumb rule on when an investor can apply a particular VAT option and subsequently elaborate into details.
5% VAT Reduced Rate
The Thumb Rule:
You are able to charge a discounted rate of 5% VAT in certain scenarios within a property where the work involves
- Conversion of premises to different residential use
- Renovation or alteration of an empty residential premises
Can you imagine about 15% savings on incurred costs should the building qualify for this reduced rate.
The Detail On 5% VAT:
A 5% VAT is applicable when a single dwelling conversion is being converted to either of the three options below
- to a different number of dwellings i.e. increasing or decreasing the number of dwellings.
- a multiple occupancy dwelling like an HMO.
- a residential purpose building like premises for either students or patients as an example.
Likewise:
5% VAT is also applicable if a multiple occupancy dwelling is being renovated to
- a single residential dwelling
- a residential purpose building
And finally:
5% VAT is also applicable when a property
- has been empty for at least 2 years before the start of your renovation works with some stated exceptions.
- a purpose-built residential dwelling is being converted to a single household dwelling or multiple household dwelling.
To better explain it visually, here is a table that outlines when a 5% VAT can be applied specifically picked from HMRC VAT construction manual.
5% VAT On Services
You can also avail of 5% VAT on specific services related to
- means of providing water, power, heat or access
- means of providing drainage or security
- provision of means of waste disposal
The HMRC Specifics For 5% VAT:
Section 7 and Section 8 from Building and Construction (VAT Notice) by HMRC outlines specifics of a 5% discounted rate applied to both scenarios of renovating to different dwellings and for empty houses renovation respectively.
Zero VAT Rate
All products and services where the VAT is still applicable but have to be charged at 0% is what it means by definition.
The zero vat rate has to still be charged on invoices and have to be recorded on VAT returns as normal.
The Thumb Rule:
The zero VAT rate is applicable in a nutshell to the following scenarios.
- New building construction is designed as a dwelling that is used solely for a “relevant residential purpose” or “relevant charitable purpose”.
- Zero-rated for the first sale of, or long lease in of premises constructed for purposes of relevant residential or charitable purpose.
- Zero-rated for the first sale of, or long lease in of non-residential building converted to use as relevant residential purposes.
- Zero-rating the sale of or long lease in, substantially reconstructed protected buildings.
The Detail On Zero VAT Rate:
If a property is eligible for a zero VAT rate falling under any of the categories described in the thumb rule section above
Then:
There are few pointers that can be applied to understand if construction is considered a qualified building to apply a Zero VAT rate.
The key ones being either of the below:
- Demolition Check: Any pre-existing build has to be demolished to ground level before constructing a new premise. Cellars and basements can be retained.
- Facade Wall Check: The new construction can retain a facade wall i.e. a street-facing wall and two facade walls in case of a corner property if it is deemed as a condition or required as per planning consent.
- Extension Check: A new construction being built as an extension to existing premises results in creating an additional dwelling.
- Collective Units: A building within a collection of buildings being constructed at the same site and same time (one unit after the other is allowed) together intended to be used for relevant residential purposes.
The HMRC Specifics For Zero VAT Rate:
Section 3, Section 4, Section 5 and Section 10 from Building and Construction (VAT Notice) by HMRC outlines specifics of 0% VAT rate applied to all listed scenarios above in this section.
VAT Exempt
Items or goods and services where no VAT is applicable are termed as VAT exempt.
The Thumb Rule:
Following are the majority of scenarios where VAT is deemed exempt within property transactions.
- Residential lettings are exempt from VAT including buy-to-lets, HMOs or rent to rents (not SA).
- The sale and letting of commercial properties are exempt from VAT.
- Lease of commercial property and old commercial building older than 3 years.
- Garages and parking spaces are let together with dwellings for residential use.
- Parking grant or license to occupy land on which incidental parking takes place.
- Property, land and buildings – grant, or licence, to occupy land or buildings.
- Transfer of going concern where the buyer intends to carry out same type of business as what is operated by the seller within the property concerned.
The Detail On VAT Exempt:
VAT is exempt from a property transaction providing it falls in one of the categories mentioned above in the thumb rule section.
However:
A business is allowed to choose to charge VAT or not on sale and letting of commercial property as part of “Option To Tax” facility.
A little more explanation on this option is explained in the further section below.
While financial services mostly including loans, mortgages and like are exempt from VAT, there are exclusions like the below list but not restricted to
- Bookkeeping
- Investment, taxation and financial advice services
- Portfolio management
- Debt collection service
Things To Know Within Property VAT
Option To Tax
The option to tax allows a business to charge VAT on sale or rental of land and buildings i.e. make such property a taxable supply which otherwise would be an exempt supply.
This is usually opted to tax to enable businesses to reclaim VAT on related costs including any professional costs or otherwise.
While that defines it at a definition level, the full details on this topic can be referred here.
Relevant Residential Purpose
Relevant residential purpose includes the provision of residential accommodation for children, personal care of people due to old age/disability, a hospice, a monastery/nunnery or for members of armed forces.
Eligibility Criteria
The section may generalise the eligibility criteria for application of various VAT types but the detailed notes have to be referred from the VAT guide provided by HMRC.
- The building has to be qualified to be able to apply either of the VAT options discussed above.
- You hold a VAT certificate where deemed necessary.
- Your services are made in the course of the construction of that building.
VAT Registration Criteria
Your business has to be VAT registered if
- the taxable turnover is going to be over £85000 in the next 30 days
- the taxable turnover in the last 12 months had been over £85000
The £85000 is deemed as the VAT threshold and if your business taxable turnover is less than the threshold, you could still opt to register for VAT if required.
Find the full details on VAT registration criteria here.
Disclaimer: None of the editors or team members within Limitless Monks are qualified accountants. Hence, this post is to be taken as a knowledge share than professional advice. If you need professional advice, please seek assistance from your accountant or contact our qualified accounting partner.
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