VAT is a very complex area of tax however we have sought to provide a general overview of VAT and how it relates to the property business.
Simply put, as Property is generally exempt from VAT, Limited Companies operating in this area are not able to register for VAT in the first place and so cannot claim back VAT on their operations.
The only difference to this is if a property development company is building residential dwellings from scratch to sell on, as new build developments are zero rated. In this case they can reclaim all the VAT, indeed any contractors working on this project should also charge their services at zero rated VAT so the developer does not pay VAT in the first place.
For residential Property refurbishment, the only way Property investors can benefit in VAT terms is where the contractor/builder they are using is able to charge them VAT at a reduced rate of 5%. However, this can only happen if the changes being made to the residential property are classed as a conversion such as:
- One house into several flats
- Two or more flats into a single house
- Two semi-detached houses into a single detached house
This reduced rate also applies to conversions of commercial property into residential use.
The 5% rate also applies to renovation work on residential property which has been empty for a period of 2 years before work commences.
Unfortunately, these are the only circumstances that apply and so any client having a refurb done outside these situations will not be able to benefit from a reduced rate of VAT.
Also remember that it is the Contractor/builder that charges the services (and any inclusive goods being installed) at the lower rate. He must then reclaim any VAT back himself from the purchase of these goods from the supplier who will have charged him at the full 20% rate.
Put another way:
The reduced rate of 5% is applied only to ‘services’ relating to the renovation of a previously empty dwelling, renovation/repair/building work are all services.
Buying doors from B&Q is a supply of goods, not services.
The retailer selling goods doesn’t know what you are doing with the goods you buy and if everyone said “oh, I’m repairing an old house more than 2 years old” then everyone gets 5%. It doesn’t work like that. The onus is on the contractor, not the builders merchant.
What happens is the contractor(s) you engage to do your repair/extension works, THEY buy in the goods from B&Q or wherever and pay 20% to the shop and then they provide you with a service and they charge you 5% VAT for their service (which consists of goods and labour). They can reclaim the 20% charged to them when they bought the goods and so they aren’t out of pocket and you get a cheaper job.
Using a non-VAT registered contractor means you cannot avail yourself of the reduced rate of VAT, nor can you reclaim yourself – you can only reclaim VAT if you are VAT registered under the conditions mentioned above or under the self-build DIY scheme.
The relevant legislation is in HMRC VAT Notice 708: Building & Construction https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction
This Factsheet is a summary of company & tax legislation for property businesses and is not intended as advice. Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should take personalised advice.
Further Information & Services
Personal advice on ACCOUNTING AND TAXATION of your property business
Contact Ian Spreadbury on 0781 300 9682 or firstname.lastname@example.org