VAT Advice for a residential property (that has not been lived in for over 10 years)

[James Frome]

Hi everyone, 

Firstly, I want to say thank you for looking at my post. I hope to learn from you all and contribute myself in time. I have spoken to HMRC a number of times, but I am getting conflicting answers (probably due to my explanation!), and I can't seem to find clarity for myself after reading VAT Notice 708 thoroughly. 

I recently purchased a property in London. This property has not been lived in for over ten years. I am planning to live in the property after the renovation works are complete. The renovation works are expected to be carried out by a contracted building team. 

 

1. Am I eligible for VAT reduction to 0% or 5%? 

 

I am confident that I am eligible for the 5% rule to the appropriate works and materials given that the building has not been lived in for 10 years. However, I am unclear as to whether I am eligible for the 0% VAT -  looking at Section 5 of Notice 708 ("Zero rating the sale of, or long lease in, non-residential buildings converted to residential use), I gather that if I was a property developer, I would be eligible for the 0% rule, assuming I sold the property after works were complete. As I am planning to live in the property after the renovation works, can I still get the 0% VAT?

If so, would this be done on the go, or would it be done retrospectively through the DIY Housebuilders Scheme Claim Form (or is this only for new builds)? If the DIY Housebuilders Scheme is the appropriate path, would the building team charge 5% VAT originally, and then I claim back the 5% after works are completed? 

 

2. The second question revolves around the proportion of works that is eligible for this VAT reduction (whether 0% or 5% / or maybe some is applicable at 0% and some is applicable at 5%?). Given the state of disrepair, we are planning to rebuild the current roof and construct a loft conversion; we are also planning to knock down the outrigger on the ground floor and rebuild it (but bigger). How does this work with VAT? Is the proportion of the original building at a reduced rate of VAT (whether 5% or 0%), with the additional square footage at 20% VAT? Or is there an alternative formula for this given my context?

 

3. Any other guidance or advice for navigating and optimising this process is also welcome 🙏

 

Thank you 😀

James

[Andrew Jones]

Your project will be classed as a conversion in the eyes of HMRC. What that means to you is every contractor coming to site to do work for you should charge you the reduced rate of VAT which is 5% and any purchases you make will be at the usual 20%. Come the end of the build you can reclaim all your VAT, so that’s the 5% you have paid contractors plus the full 20% from the suppliers invoices making your build zero. This will apply to the whole project. 

[James Frome]

Thanks Andrew. 

So as I now understand it, all works and services through the build will be charged at 5% VAT (assuming it is done by the contracted builders). After the works are complete, I will use the DIY Housebuilders Scheme Claim Form to get a VAT refund on that 5% (assuming all the paperwork is in order). 

Does that sound about right? 

Thank you!

[Andrew Jones]

[James Frome]

Thanks for this Andrew. 

Can I just confirm that I am ok to do the "reduced rate of VAT at source"? (i.e. 5% for labour and materials). 

The line above "You should pay 20% VAT on materials purchased and the reduced rate of 5% VAT to contractors" has thrown me a little - I am assuming that means that you only pay 20% on materials that you purchase yourself (i.e. if the contractor purchases it, it is ok to log as 5%)?? 🙏

 

[Temp]

In short..

 

If you buy materials from a builders merchant you pay 20% and reclaim 20%.

If a tradesman supplies and fits materials then they charge you 5% on both labor AND materials and you reclaim 5% on both.

 

In detail..

 

The important thing is to pay any trades you hire the correct 5% rate. If you pay 20% VAT on labor you can't reclaim it later as HMRC won't refund VAT paid in error. So when you get quotes make sure they say VAT at 5%. If not ask for them to be amended before you accept them.

 

Some trades may question this if they aren't familiar with the rules. It may help if you give them a "certificate". This is essentially a letter from you stating that the work they are to carry out is on a property being reinstated after 10 years empty. Include your contact details, the site address and any planning permission reference numbers. There might be a template in VAT 708 or someone here can probably post one they wrote.

 

If someone quotes to "supply and fit" then both their labour and materials should be 5% rated. Some trades may not like this as they pay 20% when they buy them. This should be sorted out when they make their VAT return but some trades still worry about it. If any refuse to 5% rate your only option is to buy materials yourself paying 20% and reclaiming 20% later. You can then "free issue" the materials to the trade to fit. The downside is the trade might get a better discount than you.

 

Under no circumstances must anyone live in the building before work starts as that resets the 10 year clock. However i believe you can move in a few days after work starts if necessary. T

 

Edited April 13, 2022 by Temp

[James Frome]

Hi Temp, 

That makes sense to me; I understand now. I have seen the "certificate" template on the HMRC website, so can use that as additional persuasive firepower for the building contractors. 

Thanks to you both 🙏
 

[Temp]

You can also see the reclaim form here. Search it for "10 years". It asks you to provide evidence its been empty. Try council tax dept?

 

https://www.gov.uk/government/publications/vat-refunds-for-diy-housebuilders-claim-form-and-notes-for-conversions-vat431c

 

Some other things to think about...

 

VAT: I know you plan to live in it but if circumstances change, do not rent it out without seeking tax advice. If you let out the property you may have to repay any VAT you saved under the scheme. This is because letting income is VAT exempt not zero rated. The difference may seem trivial but if something is exempt it means you can't reclaim so called "input vat" on your costs. House sales are zero rated so you can. Its not clear if this also applies to something like a property let via AirBnB. 

 

CIL: You mentioned a loft conversion. If this is big (close to or over 100sqm) you should check out the CIL rules. If they apply you might be exempt but only if you claim the exemption before work starts. The 100sqm rule is the total increase in floor area so it might apply if a small extension and loft conversion together add more than 100sqm. 

Edited April 13, 2022 by Temp

[James Frome]

Hi Temp, 

I emailed the council for an empty living proof earlier today; it is been processed now (the property was delisted from council tax in 2007, so should be straight forward). 

In terms of VAT and rental, that is good to be very aware of - thank you. 

In terms of CIL, I had never heard of that. Fortunately, I expect the loft conversion and the extension to only add 50sqm max, so I think we are ok 😀

[Roundtuit]

11 hours ago, Andrew Jones said:

Your project will be classed as a conversion in the eyes of HMRC.

Not if it was previously a residential dwelling as the OP suggests, surely?  I thought that applied for converting old offices/commercial buildings etc into dwellings?

[Roundtuit]

6 minutes ago, Roundtuit said:

Not if it was previously a residential dwelling as the OP suggests, surely?  I thought that applied for converting old offices/commercial buildings etc into dwellings?

Sorry, just read up on the 10yr rule; I now understand that hmrc view 'conversion' and '10 Yr rule' renovation as effectively the same thing. Every day's a school day!

[James Frome]

In terms of question two, do you have any initial thoughts or advice? 
 

"The second question revolves around the proportion of works that is eligible for this VAT reduction. Given the state of disrepair, we are planning to rebuild the current roof and construct a loft conversion; we are also planning to knock down the outrigger on the ground floor and rebuild it (but bigger with a small extension; this is all connected to the main building). How does this work with VAT? Is the proportion of the original building at a reduced rate of VAT, with the additional square footage at 20% VAT? Or is there an alternative formula for this given my context (property has not been lived in for over 10 years)?"

Thank you!

[James Frome]

After speaking with HMRC, and looking at clause 8.4 of VAT Notice 708, it states: "Other than installing goods that are building materials, you can also reduce rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the dwelling." 

 

From this, I gather that an extension and loft conversion connected with the main building will be at the reduced rate of VAT. Please advise if this is incorrect? 

 

The other interesting part that isn't entirely clear, is around the garden. The garden needs renovating as well. There is concrete on the floor that needs taking up as well as work on getting rid of overgrown plants. How would the garden works function with VAT? I can see on the DIY Housebuilders Scheme that turf is at the reduced rate, as are plants and trees (if detailed on a landscaping scheme approved by planning permission). Any insights into the garden labour / goods with regards to VAT would be appreciated 🙏

This section from VAT Notice 708 may provide some insight: 

3.3.4 Work closely connected to the construction of the building

Subject to paragraph 3.3.6, your work is closely connected to the construction of the building when it either:

(a) allows the construction of the building to take place, such as when you:

• demolish existing buildings and structures as part of a single project to construct a new building or buildings in their place (the granting of a right to remove materials is not the supply of demolition services and is standard-rated)

• provide or improve an access point to a building site to allow deliveries to be made

• carry out ground works (including the levelling and drainage of land) as part of the process of constructing a new building or buildings in its place

• provide site clearance or ‘builders’ clean’ services

• secure the site

(b) produces works that allow the building to be used, such as works in connection with the:

• means of providing water and power to the building (this can extend to the work required to make the connection to the nearest existing supply)

• means of providing within the development site access to the building (for example roads, footpaths, parking areas, drives and patios)

• means of providing security (such as walls, fences and gates - but note that most electrical appliances are always standard-rated, further information is in paragraph 13.6)

• provision of soft landscaping within the site of a building (such as the application of topsoil, seeding with grass or laying turf)

The planting of shrubs, trees and flowers would not normally be seen as being ‘closely connected…’ except to the extent that it’s detailed on a landscaping scheme approved by a planning authority under the terms of a planning consent condition. This does not include the replacement of trees and shrubs that die, or become damaged or diseased.

It’s not possible to produce an exhaustive list of services that are closely connected to the construction of the building, and each case not included in (a) and (b) must be looked at on its own merits.

You need not be the main contractor in order for your supplies to be considered to be ‘works closely connected…’. You can be a subcontractor or another contractor.

 

 

Edited April 14, 2022 by James Frome
Update

[Temp]

5 hours ago, James Frome said:

After speaking with HMRC, and looking at clause 8.4 of VAT Notice 708, it states: "Other than installing goods that are building materials, you can also reduce rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the dwelling." 

 

From this, I gather that an extension and loft conversion connected with the main building will be at the reduced rate of VAT. Please advise if this is incorrect? 

 

I believe that's correct but not done it myself.

 

 

5 hours ago, James Frome said:

The other interesting part that isn't entirely clear, is around the garden. The garden needs renovating as well. There is concrete on the floor that needs taking up as well as work on getting rid of overgrown plants. How would the garden works function with VAT? I can see on the DIY Housebuilders Scheme that turf is at the reduced rate, as are plants and trees (if detailed on a landscaping scheme approved by planning permission). Any insights into the garden labour / goods with regards to VAT would be appreciated 🙏

 

I suspect the same rules that apply to a new build apply to a conversion or reinstatement. Eg Demolition is reduced rated. Trees and plants only reduced if part of a landscaping plan required as part of an approved planning permission.

 

I would ask someone to quote to "Demolish concrete hard standing, level and prepare ground for turf and lay turf" get them to charge you 5% and  reclaim it. You will probably have to pay VAT on any replanting/new trees.