Renovation: Revisiting the 5% VAT rate

Over the past few months, I’ve discussed most of the main principles of the 5% VAT rate for renovation projects. I’ll be looking at many of those principles in more detail in the New Year, along with some more practical issues to help you make the most of the potential VAT savings.  In the meantime, I thought that this would be a good time to sum up the most important issues.

How do you get the 5% relief?

One of the most common queries I get is how to claim the relief. People often assume that you pay the normal 20% rate then make a claim to HMRC to for the 15% “overpaid”. But this isn’t how it works.

You can’t claim overpaid VAT from HMRC.

The way it works is that contractors and suppliers charge 5% instead of the standard 20%. The VAT rules enable contractors and suppliers to charge 5% for their services and any goods provided in connection with those services, as long as the conversion meets certain criteria.

For example, if you buy a bathroom suite and fit it yourself, then you have to pay 20% VAT for the suite, but if the suite is supplied and installed by a contractor, then the 5% rate applies to the contractor’s services and the suite. Building materials and other goods that you buy to install yourself are always liable to VAT at 20%.

What can you claim?

The 5% relief was introduced over 10 years ago as part of a number of measures to encourage developers to use existing properties by converting non-residential properties AND refurbish empty residential properties.

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The rules were designed to reduce the VAT cost of conversions when people brought old, unused dwellings back into use and include a number of criteria that must be met to qualify for the reduced rate of VAT.

  • The 2 year unoccupied rule exists so that the relief isn’t available for work on occupied dwellings. To prove this, ideally, you need a letter from the “empty property officer” at the local council to confirm that the property hasn’t been occupied during that time.
  • if you’re planning to move into an empty property during the course of the renovation, you can only get the 5% rate if the property was empty for 2 years before you move in, if the contractors started their work BEFORE you move in AND the work is finished within 12 months of you moving in.
  • The relief is similar to the zero-rate which is applies to construction of new homes and extends to a wide range of services from repairs and maintenance to redecoration to extensions.
  • You don’t have to give suppliers or contractors a certificate to claim the 5% rate, but it’s a good idea to provide some sort of written declaration confirming that your renovation meets the criteria and provide a copy of the “unoccupied property” letter from the “empty property officer”.

Either way, it’s up to you to understand the rules and ask your contractors and suppliers for the reduced rate.

HMRC guidance

The rules are explained more detail in HMRC’s VAT Notice 708; Buildings and construction, s7. I’d suggest that you save this link so that you’ve got easy access to the information, especially if you’re discussing the issue with prospective contractors or suppliers and ensure that your contractor/supplier agrees whether the 5% rate applies this before you sign the contract.

You’re in the driving seat…

One thing that surprises me is that 10 years after the introduction of the 5% rate, many contractors and retailers don’t seem to know about it. I suspect that many property renovators have paid too much VAT because neither they, nor their suppliers, understood the rules.

But as a customer, you’re in the driving seat with this issue so make sure that you don’t pay more VAT than necessary, even if it means shopping round a bit. It’s your money and that 15% VAT saving is important. And if you think you’ve overpaid VAT on renovation work done in the past, you may be able to claim overcharged VAT from suppliers or contractors if the work was carried out within the past 4 years. I’ll discuss this in more detail in the new year.

For many of us, living in a beautifully renovated property is a bit of a dream, because it’s such a huge undertaking. But we’ve all seen old homes that are crying out to be restored and lived in, so saving VAT on your costs can help to make that dream a reality.

Whether you’re still in the “dreaming” stage or you’re in the middle of your own renovation project, I hope you have a wonderful Christmas and that you’re looking forward to a very happy, healthy and prosperous new year!