For many property owners, VAT is simply accepted as part of the cost of a refurbishment or conversion project. However, what many people do not realise is that certain building works may qualify for a reduced VAT rate of 5%, potentially saving tens of thousands of pounds over the course of a project.
Unfortunately, the VAT rules surrounding property conversions and refurbishments are some of the most complex areas of UK VAT legislation. As a result, opportunities to legitimately reduce VAT costs are often missed.
A complex area with significant financial consequences
Reduced-rate VAT reliefs can apply in a range of circumstances, including:
- Converting commercial property into residential accommodation
- Altering the number of dwellings within a property, such as converting a block of flats into a single dwelling or vice versa
- Refurbishing residential properties that have been empty for at least two years
While the concept may sound straightforward, the detailed rules can be surprisingly intricate.
For example, where a property is being converted from multiple dwellings into a single dwelling, some elements of the building work may qualify for the reduced 5% VAT rate. The reduced rate can apply to items such as internal doors, sanitary ware, heating systems and certain flooring materials. However, similar-looking items can attract different VAT treatments. Ceramic floor tiles may qualify for the reduced rate, while carpets generally remain subject to VAT at 20%. Likewise, fitted cupboards may qualify, whereas free-standing furniture does not.
These distinctions are not always obvious, even to experienced contractors.
The costly “better safe than sorry” approach
Given the complexity of the rules, many contractors choose the simplest option and apply VAT at 20% across the board. From their perspective, this reduces the risk of getting the VAT treatment wrong.
For property owners, however, this cautious approach can come at a significant cost.
On larger refurbishment and conversion projects, the difference between applying VAT at 5% rather than 20% to qualifying works can easily amount to tens of thousands of pounds. In some cases, we have identified VAT savings that substantially exceed the cost of obtaining specialist advice.
How specialist VAT advice can help
Working alongside architects, surveyors and property professionals, we help clients identify where reduced-rate VAT reliefs may apply and provide the technical support needed to give contractors confidence in applying the correct VAT treatment.
Our involvement typically includes:
- Reviewing the nature of the project and identifying available VAT reliefs
- Producing a detailed VAT report setting out the applicable legislation and HMRC guidance
- Reviewing contractor cost schedules and specifications
- Identifying which elements qualify for reduced-rate treatment and which remain standard rated
- Providing supporting documentation that can be shared directly with contractors and professional advisers
This provides certainty for all parties involved and helps ensure that the correct VAT rate is applied from the outset.
A relatively small investment with potentially substantial savings
The cost of obtaining specialist VAT advice is often modest when compared with the savings that may be available.
In many cases, a detailed review can be completed for a fee in the region of £4,000 to £5,000. Where reduced-rate reliefs are available, the resulting VAT savings can often be many times greater than the advisory fee itself.
Importantly, if a project does not qualify for any VAT savings, we will say so. Our objective is to ensure that clients pay the correct amount of VAT, no more and no less.
An opportunity for architects and property professionals
Architects are often the first advisers involved in a refurbishment or conversion project and are therefore ideally placed to identify situations where a specialist VAT review may be worthwhile.
Where a client is planning a significant residential conversion or refurbishment, a simple suggestion to seek VAT advice could save them a substantial amount of money while adding value to the professional service already being provided.
We regularly work with architectural practices and can engage directly with the end client or, where preferred, provide support as part of a wider professional service offering.
Could your project qualify?
If you are planning a property conversion, redevelopment or refurbishment project, particularly one involving a change of use, a change in the number of dwellings, or a property that has been vacant for an extended period, it may be worth reviewing the VAT position before works commence.
A relatively small investment in specialist advice could unlock significant savings and help ensure that the correct VAT treatment is applied throughout the project.
To discuss whether your project could qualify for a reduced VAT rate, please contact Stephen Patey, SPatey@haysmac.com
