Renovation: What sort of work qualifies for the 5% rate?

So you’ve got a letter from the Empty Property Officer confirming that the property hasn’t been occupied during the past couple of years.   You’re probably very relieved about getting past this hurdle,  but that’s just the start of the process.

Many renovators assume that the 5% reduced rate will apply to all renovation work.  However, it’s not as simple as this because the 5% rate only applies if the work meets certain criteria.

The subject is covered in VAT Notice 708: Buildings and construction, s8.4, but I’ll try to explain the main principles in less technical terms below with some examples.

The main categories that qualify for 5% are as follows:

“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)”….and

certain works that are outside the house itself but “within the immediate site of the dwelling that are in connection with the”.. provision of water, power, heat, access, drainage, security or waste disposal.

At first glance, it seems as though the 5% covers almost everything, but as always with VAT,  it’s the details and interpretation that cause problems. For example, what does the word “alteration” mean in this context? Plus s8.4 of Notice 708 only briefly mentions that the reduced rate applies: “Other than installing goods that aren’t builders’ materials…”   In fact, this somewhat throwaway phrase refers to one of the most important criteria.

Goods: Builders’ materials

The reference in s8.4 means that the supply and installation of goods MUST fall within the definition of “builders’ materials” to qualify for the 5% rate.  But what does this mean?

The definition is explained in VAT Notice 708, s13 . Like all definitions, it includes a number of criteria, too many to include in this blog. However one of the most important is that the goods concerned must be of a type that is “ordinarily included” in that type of property.

What about those free range cookers?

You’d assume that ovens and cookers would be regarded as “ordinarily included” in a home. But not according to the VAT legislation. This is because the law also says that most gas and electrical items AREN’T included, unless they are to provide heat air or water for the whole of the property and are permanently linked to a heating module or boiler.

So how about those Agas and other similar range cookers? Well unless they are linked to the heating or hot water system, they are liable to 20% VAT, whether or not free-standing or incorporated into the kitchen.

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In addition to most electrical and gas appliances, you’ll also have to pay 20% on carpets and carpet materials, even if they are specially made to replace original floor coverings. So it’s important that you read section 13 of Notice 708 before discussing the liability with your suppliers.

Exterior works

One other particularly difficult area is work done outside the building itself. This only qualifies for the reduced rate if it’s within the “immediate site” of the property and is in connection with the:

• means of providing water, power, heat or access
• means of providing drainage or security
• provision of means of waste disposal.

So the reduced rate doesn’t apply to works to the gardens, walls (other than basic fences) or gates. But what about other stuff, for example pipework, cables or the driveway? How do you define when a sewerage pipe falls outside the “immediate site” of a property?

Isn’t there a list of reduced rated work?

Unfortunately there isn’t a list of exterior work that qualifies for the reduced rate, but HMRC tend to apply this rule strictly. The definition includes the “means of providing security”, but HMRC usually interpret this heading in a very restricted way – for example, the provision of normal door and window locks is usually accepted, but not more sophisticated equipment, such as CCTV systems or electronic devices to control gates.

Detailed and expensive

The subject of VAT on renovation works is particularly difficult because the rules are so detailed. Unfortunately, you really can’t ignore it as it can mean the difference between paying VAT at 5% or 20% and this can put an unexpected strain on your finances.

My best advice is to assume that you’ll be paying 20% VAT on everything and only adjust your budget and cash-flow calculations once you’ve agreed the liability with the contractor. And even then remember that HMRC may dispute the liability at a later date, so make sure that you’re not liable to pay any additional VAT once the contract is completed.