VAT: Renovation or Conversion and why does it matter?

In my previous blog, I explained that you can save VAT on contractors’ costs for certain renovations and conversions because the services are liable to VAT at 5% instead of 20%.

Of course that’s assuming that your contractors are VAT registered, but I know that many developers try to minimize VAT costs by using non-registered contractors and buying goods and materials directly to get the best deals. And this can be a very good way of saving money. However it depends on the amount of money you’re spending and the proportion spent on the the materials services. Generally speaking, if the proportion of materials is higher than the value of the services, then you could save money by engaging VAT registered contractors to supply the goods and services. I’ll discuss this in more detail in my next blog.

So what’s the difference between a renovation and a conversion for VAT purposes?

The detailed rules are set out in HMRC VAT Notice 708: buildings and construction: I’ve highlighted the relevant sections below in case you want to look at the detailed rules.

• A renovation is when you start working on a single dwelling and end up with a single household dwelling. If you employ VAT registered contractors, they can charge the reduced rate of 5% on a wide range of work, from repair, maintenance, extensions, improvements; e.g. constructing a garage at the same time.

The most important criteria is that the dwelling has been unoccupied for at least 2 years before the work commences; see section 8 of Notice 708 for more information about this.

• A conversion is when you change the number of self-contained dwellings in a property, such as the conversion of a house into flats, the conversion of a commercial building into a dwelling – such as a barn conversion, or the conversion of an office block into flats.

One of the most important factors is what is meant by a self-contained dwelling? For example the conversion of a pub with an existing self-contained flat into a single house isn’t a conversion because the whole property still only contains a single dwelling after the conversion. However if the accommodation wasn’t self-contained, perhaps just a few rooms and a bathroom, but no separate front door or domestic kitchen facilities, then it would be regarded as a conversion because you’ve created a dwelling in a property that previously didn’t contain a dwelling. See section 7 of Notice 708 for more information about this.

What if your development is part renovation and part conversion?

salisbury-534904_1280.jpg aug 2015

Some developments include both renovation and conversion at the same time. Let’s think about a pub conversion. Suppose you buy a pub with a self-contained flat, intending to convert it to a single house. Under the conversion rules, the reduced rate won’t apply because there is no change in the number of dwellings in the property.

However, suppose the flat has been unoccupied for over 2 years, under the criteria set out in section 8, Notice 708. In that case, the project may qualify as a renovation for VAT purposes, which means that the reduced rate could apply not only to the work done to the flat, but also to some – possibly all – of the work done on the rest of the property.

That’s why you need to understand the difference between a renovation and a conversion for VAT purposes. You can work out whether your development falls into either category and whether your contractors’ services are eligible for the 5% rate under either – or both – of the two sets of rules.

Next time, I’ll show you how to work out whether it’s cheaper to buy materials direct or through a VAT registered contractor, with a few practical examples showing how to apply the principles to your development. There’s no magic formula – for the most part, it’s a case of some good old basic arithmetic, a calculator and the back of a lot of envelopes!