Do you hate VAT as much as we do?
Whether you’re building your own home, renovating an empty property, converting a commercial building or taking on a larger residential scheme, VAT can be a significant cost — and one that’s easily overlooked when you’re focused on planning, design and construction.
But VAT isn’t necessarily the same for every project. Depending on the type of property, its previous use, what you’re proposing to create and the nature of the work, there may be opportunities to reduce the VAT payable on qualifying elements of your project.
The important thing is to consider VAT before the project commences.
Once work has started, contracts are in place and costs are being incurred, it can be much harder to identify opportunities that could have been considered at the outset. So, if you’re assessing a residential project, don’t just ask:
“What will it cost to build?”
Also ask:
“What VAT savings could potentially be available?”
It’s Not Just New Builds
New residential construction is probably the best-known area for VAT savings. Where the relevant conditions are met, the construction of qualifying new houses and flats can be zero-rated, meaning 0% VAT is charged on qualifying construction work. But that’s not the only opportunity.
There are also specific VAT rules covering:
- Renovation or alteration of qualifying residential properties that have been empty for at least two years
- Converting non-residential buildings into dwellings
- Converting a building to create a different number of dwellings
- Certain conversions into HMOs
- Certain buildings being converted for relevant residential purposes
The VAT treatment depends on the circumstances of the individual project, so the same type of work can potentially have different VAT consequences depending on what you’re actually doing. If you’re planning a residential project, VAT should be considered from the outset, alongside the purchase price, construction costs, professional fees and overall viability. A potential VAT saving could make a real difference to the numbers.
Got an Empty or Derelict Building?
An empty or derelict property could potentially offer an opportunity for VAT savings that isn’t immediately obvious. Where the relevant conditions are met, certain renovation and alteration works to a qualifying residential property that has not been lived in for at least two years consecutively and directly before work starts can be charged at 5% VAT rather than 20%.
The difference can be significant.
For example, on £200,000 of qualifying works:
20% VAT = £40,000
5% VAT = £10,000
That’s a potential £30,000 difference.
On £500,000 of qualifying work, the difference would be £75,000.
Of course, these figures relate only to work that actually qualifies. Not every cost within a refurbishment project will necessarily receive the reduced rate. And being described as “derelict” isn’t enough by itself. The property needs to meet HMRC’s requirements, including the relevant period of non-occupation. Evidence of the property’s history may be required, such as council tax records, utility records or information from the local authority. So if you’re looking at an empty property, its history could be just as important as its condition.
Commercial → Residential
Converting a non-residential building into residential accommodation can also create an opportunity for VAT savings. This could include projects such as:
Office → Flats
Shop → House
Warehouse → Apartments
Barn → Dwelling
Where the relevant conditions are satisfied, qualifying conversion work can potentially be charged at the 5% reduced rate rather than 20%. One of the key considerations is whether the project genuinely represents a qualifying conversion to residential accommodation, rather than simply refurbishment of an existing dwelling. The resulting accommodation also needs to meet HMRC’s requirements for a dwelling. For example, a self-contained dwelling would generally need the necessary facilities for everyday living, including areas for sleeping, living, cooking, washing and using the toilet, within the accommodation itself.
Planning and building control can also form part of the assessment. Where statutory approval is required, the relevant approval needs to be in place for the reduced rate to apply. So if you’re considering a commercial-to-residential conversion, don’t assume 20% VAT is inevitable — but don’t assume 5% is automatic either. The details of the building and the proposed conversion matter.
One Building → Multiple Dwellings
Changing the number of dwellings within a property can be another area where VAT savings may be available.
For example:
One large house → four self-contained flats
or
One dwelling → two dwellings
Where the project meets HMRC’s conditions for a conversion resulting in a change in the number of dwellings, qualifying conversion work can potentially benefit from the 5% reduced rate. The important point is that the development needs to result in a genuine change in the number of qualifying dwellings. The precise definition of the building or part of the building being converted, the existing use and the proposed arrangement all need to be considered. This is another reason why the design and VAT assessment shouldn’t be looked at in isolation. The layout you’re creating can have a direct bearing on whether the project falls within the relevant VAT rules.
And What About HMOs?
HMOs can also qualify for the 5% reduced rate of VAT — but there are specific conditions. For VAT purposes, HMRC defines an HMO as accommodation designed for people who don’t form a single household. This could include bedsit-style accommodation where occupants have their own living space but share facilities such as a kitchen or bathroom. Where a building is converted into a qualifying HMO, certain conversion work can be charged at 5% VAT rather than 20%, provided the relevant conditions are met.
The important point is that not every property described as an HMO will automatically qualify. The way the accommodation is designed, how it will be used and what the building was used for before the conversion all need to be considered. So, if you’re planning an HMO conversion, don’t simply assume the work will be charged at 20% — or that it will automatically qualify for 5%. The VAT position should be checked before the project starts.
What Doesn’t Qualify?
This is where things get more complicated. A project qualifying for a reduced or zero rate doesn’t mean that every cost associated with the project automatically receives the same treatment. Certain professional services, for example, remain standard-rated. This can include services such as:
- Architects
- Surveyors
- Consultants
- Project management and supervision
Other items can also remain subject to the standard 20% rate, including certain landscaping, carpets, fitted furniture and other goods or services that don’t meet the relevant conditions. This means you can’t simply take your entire project budget and apply a blanket 5% or 0% VAT rate. The individual works and costs need to be considered. Where a project contains both qualifying and non-qualifying works, costs may need to be separated or apportioned appropriately.
Why We Think This Matters
VAT savings can have a real impact on the cost and viability of a residential project.
Take £200,000 of qualifying renovation work.
At 20% VAT, that’s £40,000 VAT.
At 5%, it’s £10,000.
That’s a potential £30,000 difference.
For a larger project, the numbers can become even more significant. And that’s why we believe VAT should be considered before you commit to the project and before the works commence. It’s much better to understand the potential opportunities at the outset than to discover them once the project is already underway.
We’re More Than Just Design
We’re not just here to draw pretty buildings. When we’re involved in a project, we want to understand the bigger picture.
What are you starting with?
What are you trying to achieve?
What does the planning position allow?
How can the building be configured?
What could affect the viability?
And are there opportunities that shouldn’t be overlooked?
VAT is one of those considerations.
We’re not VAT advisers, and where specialist tax advice is required, we’d always recommend obtaining it. But we can help ensure the right questions are being asked early and provide the project information your VAT adviser needs to assess the position. Because good residential projects aren’t just about creating a great building. They’re about making the numbers work too.
Thinking About Your Next Project?
Whether you’re looking at an empty property, a commercial-to-residential conversion, a change in the number of dwellings, a self-build or a new residential scheme, VAT should be part of the conversation from the start. The potential savings can be significant, but they depend on the specific circumstances of the property and the work you’re proposing.
Don’t leave it until the invoices arrive. If you’re considering a residential project and want to understand the opportunities and considerations before you begin, get in touch with us.
This article is intended as general information only and is not VAT or tax advice. VAT treatment depends on the specific facts and circumstances of each project and the relevant HMRC conditions. VAT rates and legislation can change, so appropriate professional VAT advice should be obtained before relying on a particular VAT treatment.