VAT & Building your home

Understanding VAT on Construction Projects for Private Residential Homes in the UK

Something a lot of our clients are surprised to understand at the very beginning of the process when we walk them through the costs associated with a building project is that when builders talk about the price they will charge for undertaking a project they talk about ‘Plus VAT’. So, if a client has come to us with a budget of £2 million pounds for their construction project, this is actually in builder speak - £1.67 million plus VAT.

Regardless of the scale of your building project it’s really important to understand the UK’s VAT system. Certain types of housing construction projects can have atypical and complex VAT rules which, if you are aware of them and implement them correctly, can lead to significant savings. In this post, we will do a run through different scenarios we have come across of how VAT applies to different types of construction projects for private residential homes and some of the instances where a lower rate of VAT can be applied.

First off, a disclaimer that we are Architects and designers and not tax consultants or accountants and this post is just intended as an overview and a general introduction to those who have little or no experience of construction and the ensuing costs. We have worked on a number of projects where reduced VAT rates have been applicable. Please don’t take this as legal advice. Legislation is complex and ever-changing. We have a trusted selection of construction tax experts whom we can put our clients in touch with should they wish to look at alternative tax arrangements if our clients projects seem like them may be applicable. Legislation changes fast and we rely on experts to always guide our clients as to what is appropriate and legal in terms of tax arrangements.

1. VAT on New Build Homes: Zero-Rated

Our Ashdown Forest House - will be a new build home applicable for zero vating rating

One of the best aspects of building a new home from scratch in the UK is the potential VAT savings. Construction services for new build homes are zero-rated, meaning contractors can charge you VAT at 0% on most of the work involved. This offers a significant financial advantage compared to the VAT of 20% charged on a standard refurbishment or extension.

Zero Rating for New Builds:

• Zero rated VAT means you won’t pay any VAT on construction services or many materials used in the build.

• Your property must be a brand new residential dwelling, designed for private use, and not for business purposes.

• Eligible services include the construction of the building itself, as well as related services like site preparation, drainage, and utilities installation. However, architects and consultants’ fees are not zero-rated; they are subject to the standard VAT rate of 20%.

Example: Building a bespoke, modern home on a plot of land. The total cost of construction services, excluding professional fees, is £2.5 million. Without the zero-rating, you would have to pay 20% VAT (£500,000) on top of this, bringing the total to £3 million. With zero-rating, you only pay the £2.5 million for construction, which can free up substantial resources for other project elements, such as interior design or landscaping.

0%

A pleasing figure

More info at the UK government website.

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2. VAT on Substantial Reconstruction: Zero-Rated or Reduced Rates

https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708

If you plan to demolish most of an existing building and rebuild, there are VAT reliefs that can reduce the overall cost. However, it’s important to understand the specific rules governing these types of projects.

To qualify for zero-rating, your project must meet the following criteria:

• At least two-thirds of the existing building must be demolished, including all external walls above ground level.

• The project must result in a new residential dwelling, similar to the rules for new build homes.

If the demolition doesn’t meet these criteria but involves a significant transformation, you may still qualify for the reduced VAT rate of 5%. This applies in cases such as:

• Converting a non-residential building (e.g., a barn, warehouse, or office) into a residential home.

• Substantial refurbishments of residential buildings that have been uninhabitable for some time.

Example: Suppose you own a centuries-old farmhouse that is dilapidated and unsafe to live in. You plan to demolish most of the building while preserving key heritage features, such as its original stone walls. While your project doesn’t qualify for full zero-rating, the reduced VAT rate of 5% applies. On a £800,000 reconstruction cost, this means paying just £40,000 in VAT rather than the £160,000 that would have applied at the standard 20% rate.

3. VAT on Renovations and Refurbishments: Standard vs. Reduced Rate

Renovating or refurbishing an existing home and the VAT applicable will depend on the nature and extent of the work. Generally, VAT on renovation services is charged at the standard rate of 20%, particularly for routine improvements such as new kitchens, bathrooms and general building work.

However, if you are undertaking a more significant renovation project, particularly for a property that has been vacant or derelict for some time, you may be eligible for the reduced rate of 5%. This rate applies in specific cases, including:

• The property has been unoccupied for at least two years.

• The renovation involves bringing the property back into use, making it habitable again.

Key Tip: To ensure eligibility for the reduced rate, it’s important to keep detailed records of the property’s uninhabitable status and the work being done. You may need to prove to HMRC that the home has been vacant for two years or more, so you’ll need proof such as council tax records that this is the case.

Example: You have purchased a Georgian townhouse that has been empty for several years. Because the property has been unoccupied for more than two years, your renovation project qualifies for the reduced 5% VAT rate. On a refurbishment budget of £1,000,000, this means paying just £50,000 in VAT rather than the standard £200,000, saving you £150,000.

4. Conversions: Transforming Non-Residential Buildings into Homes

For those looking to convert a non-residential building into a private home, there are specific VAT reliefs available. Converting a property such as an office, warehouse, or barn into a residential dwelling is typically subject to the 5% VAT rate, provided the building has not been used as a residence in the past 10 years.

This relief can be especially valuable for those taking on unique or ambitious projects, such as transforming a historic building into a contemporary living space.

Example: If you’ve purchased a decommissioned church with plans to convert it into a luxury home, your conversion project may be eligible for the 5% VAT rate. On a £600,000 conversion, this would result in £30,000 VAT, compared to £120,000 at the standard 20% rate.

5. Maximising VAT Savings: Practical Tips for Your Construction Project

Navigating VAT rules on construction projects can be complicated, but the potential savings are substantial. Here are some practical tips to help you maximize VAT efficiency and avoid costly mistakes.

• Consult Early with VAT Experts: VAT rules are complex and change frequently. Engaging with a VAT specialist early in the planning stages of your project ensures you understand what reliefs you are entitled to and can structure the project to maximize savings.

• Document Everything: Keep meticulous records of all expenses, contractor invoices, and correspondence with HMRC. Documentation is crucial, particularly for projects involving VAT exemptions or reduced rates, as you may need to provide evidence that your property or project qualifies.

• Ensure Contractors Understand VAT Rules: Not all contractors are well-versed in VAT reliefs on construction projects. Make sure your builders and service providers apply the correct VAT rates from the start. This will avoid unexpected bills or tax audits down the road.

• Use Zero-Rated Suppliers When Possible: If your project qualifies for zero-rated VAT, ensure that you are sourcing materials and services from suppliers who understand and apply the correct VAT rules. Misapplications can result in lost savings or delays in claiming back overpaid VAT.

6. Common Pitfalls to Avoid in VAT Planning

There are several common misunderstandings and mistakes that can lead to higher VAT bills or compliance issues. Here’s how to avoid the most frequent pitfalls:

• Assuming All Home Improvements Are Zero-Rated: VAT zero-rating applies strictly to new build homes. If your project is a renovation, extension, or conversion, you’ll likely face the standard 20% VAT rate unless specific conditions (such as uninhabitable status) apply.

• Not Planning for VAT on Professional Fees: Architectural and consultancy fees are not eligible for VAT relief, even for new builds. These fees will be charged at the standard 20% rate, so it’s important to account for this in your budget.

• Failure to Meet Criteria for VAT Reductions: Projects that are borderline cases—such as demolitions that don’t remove enough of the original structure or refurbishments that don’t involve significant uninhabitability—can easily fall outside the scope of reduced VAT rates. Clarifying criteria before you begin can save substantial amounts.

7. Long-Term Considerations: VAT and Property Sales

It’s also worth considering how VAT could affect you in the future if you plan to sell the property. If you develop a new build or substantially reconstruct a property, and it’s sold as a new residential dwelling, the sale is zero-rated for VAT purposes. This is advantageous, as you can reclaim VAT on the development costs without needing to charge VAT on the sale price.

However, if the property will be used for rental or other business purposes, different VAT rules apply, which may affect your ability to reclaim VAT on the construction costs.

To sum up…

Understanding VAT on construction projects for private residential homes is vital to ensure you aren’t paying too much. By taking advantage of VAT reliefs where possible, you can save tens of thousands, if not hundreds of thousands on your project.

Whether you’re building your dream new build home, transforming a heritage building, or bringing a property back to life, applying VAT rules correctly will help you stay within budget and avoid unnecessary expenses.

If you are thinking about embarking on a residential project we would love to help, please get in touch with our friendly team to book a free initial consultation.