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Reduced VAT rate for empty residential property renovations and alterations

Requirements to qualify for 5% VAT rate on labour and materials

The costs associated with bringing empty properties back into habitability can be astronomical. Domestic building work is normally charged at the standard rate of 20%.  

However, if the property has been unoccupied for a period of two or more years it is possible to reduce the standard VAT rate of 20% to 5% on labour and the materials. In order to qualify, the property must comply with the conditions relating to a dwelling in VAT Notice 708.

There are conditions which must be complied with before the reduction is available:

  1. The qualifying residential property must be unoccupied for two years before the work commences.   
  2. The property is intended for residential purposes.

Information HMRC may need from you

HMRC may require you to show that the building has not been lived in during the 2 years immediately before you start your work.  It is necessary to spend time collecting and documenting the evidence that you will rely on to access the reduce rate of VAT. Proof can be obtained from electoral roll and council tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.  It is recommended that you obtain tax advice.

Additional conditions required to qualify 

It is possible to live in the property whilst the work is being carried out but there are additional conditions that you must comply with, firstly you must move in to the property after the work has started or you will not qualify for the reduced rate. Secondly, the following requirements must be met:

  1. The 2 years immediately before the occupier acquired the dwelling it had not been lived in.
  2. No renovation or alteration had been carried out in the 2 years before the occupier acquired the dwelling (you can ignore minor works necessary to keep the dwelling dry and secure).
  3. The services are supplied to the occupier. Sub-contractors have to charge standard rate.
  4. The work takes place within 1 year of the occupier acquiring the dwelling.

Other than installing goods that are building materials it is possible to obtain the reduced rate of VAT for any works of repair, maintenance (such as redecoration), or improvement carried out to the fabric of the dwelling. Examples of these works can range from redecoration to construction of an extension or the installation of double glazing.

Purchases and improvements exempt from the reduced VAT rate

It is worthy of note that not all the renovation and alteration works are at the reduced rate of VAT, for example, the following are at the standard-rate of 20%:

  • The installation of goods that are not building materials, such as carpets or fitted bedroom furniture
  • The erection and dismantling of scaffolding
  • The hire of goods
  • Landscaping
  • The provision of professional services, such as those provided by architects, surveyors, consultants and supervisors and lawyers.
  • Safety equipment for the contractors.

Your contractor will charge the reduced rate of VAT for their qualifying services i.e. renovating or altering the property so it is important to provide them with the necessary evidence that the property is a qualifying property.  If the contractor is not convinced the property qualifies, many of them may simply play it safe and charge the standard 20% rate.

Understanding your contract

It is also recommended that you get a specialist contract lawyer to look at the contract between you and your intended contractor. The renovation and/or alterations on the property are often a significant expense, typically in excess of a six-figure sum. It is essential to invest in protecting your interests at this stage to ensure that you understand the terms of the contract you are entering in to.

Further information

For more information from our team, please get in touch with your usual Druces contact or speak to: