Stephen Patey, Senior Manager, haysmacintyre
When constructing a new development, or repurposing an existing building, contractors or subcontractors are often unaware of the VAT liability of the work they are carrying out. In fact, some work, such as housebuilding, can qualify for either zero rate or a reduced rate of VAT. The relevant rates of VAT can apply in a range of scenarios, and vary depending on the intended use of the completed property.
New buildings
When considering new buildings, the question of how much VAT should be charged on the construction costs will depend on the type of building being constructed.
A number of qualifying services supplied when constructing a new residential property should be charged at the zero rate of VAT. These include, for example, developments that are single household dwellings, or houses in multiple occupation (‘HMO’). In addition, the zero rate of VAT also applies to construction costs of new properties that will be used for a relevant residential purpose, such as care homes or boarding houses. Buildings that are used for a relevant charitable purpose, such as academy schools or hospices, can also qualify for the zero rate of VAT.
For dwellings, it’s usually clear what the building’s purpose will be. However, for buildings that have a charitable use, contractors must obtain a certificate to confirm the property’s purpose from the HMRC website. One key point to consider is that subcontractors cannot apply zero rate VAT to their work on new buildings that are for charitable or residential purposes. In this instance, the main contractor should be charged the standard rate of VAT.
Existing buildings
For most work carried out on existing buildings, zero rating is not available and the standard rate of VAT should be applied.
However, for the conversion or renovation of a building, the 5% reduced VAT rate potentially comes into play. This could be when a non-residential property is repurposed into a residential development, or when there is a change in the number of dwellings in a building (e.g. a house being converted into flats). Alternatively, a reduced rate of VAT can also be applied to the renovation of a residential property that has not been lived in for 2 years or more.
What work is covered?
Zero rate and reduced rates of VAT will apply to all repair, maintenance or improvement works carried out on the building’s fabric in respect of developments that are already eligible for reduced VAT rates. The rates can also apply to work within the immediate site when providing water, power, heat or access, for example.
When construction materials are supplied by the builder, zero and reduced VAT rates should also be applied. Building materials are items ordinarily incorporated by builders, so the contractor should also be applying the relevant rate to these items they provide as part of the building work. Some items are specifically excluded from being considered building materials for the purposes of the relief, such as carpets and white goods. Additionally, any services provided by architects, surveyors or any other professionals will always be subject to the standard rate of VAT.
Mixed-use
In the instance of mixed-use projects, where work relates to the project as a whole, an apportionment should be carried out between the different VAT rates. There is no set apportionment method – HMRC simply require that any method is fair and reasonable. One common method is to allocate costs based on the percentage of work being charged at each particular VAT rate.
Whether working on a new-build project or the conversion of an office into residential apartments, it’s important for developers to make sure they are being charged the correct rate of VAT by their contractor. Not only will reducing the amount of VAT incurred assist with the cash flow of the project, but it will also reduce costs in situations where VAT is irrecoverable, such as in the private rented sector or build-to-rent schemes. Carefully considering the various rules involved will ensure the correct rate of VAT is being applied.