30 Nov 2010

On VAT in Construction

Just back from the last of this year's Homebuilding & Renovating shows (in not-so-sunny Somerset) and I am reflecting on my piss poor performance as a VAT expert. We get a lot of VAT queries from the visitors, and some of them I have to answer on stage in full glare of an audience. Which is fine when you are on top of your game and know every last detail, but not so good when your memory is beginning to resemble a colander. The questions have become increasingly complicated over the years and I no longer retain that capacity for remembering boring factoids like I once did. So for my benefit as much as everyone else's, here is my aide memoir on VAT and the selfbuilder.

• The starting point is very simple. If you are building a new house in the UK, you don't have to pay VAT on your costs. Professional developers do this by just reclaiming VAT on their quarterly VAT returns, and not charging it out on the house they sell at the end of the process. Selfbuilders are able to do the same thing without having to register as a business, simply by filling out form 431 (N) at the end of the job and posting off all their VAT invoices.

• It's downhill from here.

• The big fat question which keeps coming up is "What qualifies as a new build?"

• Gordon Brown, when Chancellor in 2001, widened the definition, so that many conversions qualified. If you are creating a dwelling for the first time (classically a barn conversion), then it qualifies. If it's an empty house that hasn't been lived in for at least ten years, then it qualifies. It gets complicated when you start talking about pub and post office conversions because if the buildings have been used partly as dwellings as well, then it doesn't qualify. The key point seems to hinge on whether or not the dwelling bit is or was "self-contained." By this it means if it shared a kitchen and bathroom with the commercial parts of the operation, it's not self-contained and it would qualify. If however there is a separate flat, then it doesn't qualify. At least I think that's where the line is drawn.

• You have to be going to live in the house. If you plan to rent it out, or use it as a holiday let, then it won't qualify for zero-rating.

• If you want a definitive answer, first check out VAT notice 708. If you are still unclear, you must go for a ruling to HMRC. Do this before you start!

• If it does qualify as a Conversion, it gets treated differently to a NewBuild. There are in fact (as far as I can work out) five different VAT regimes applying to construction. These are:

1. Classic new build. Zero-rated. You can reclaim all VAT on supplies you buy for the construction. Labour and supply and fix contracts should not charge you any VAT on their invoices.

2. Conversions. Providing you are creating a dwelling for the first time (or the ten year rule applies), then you are able to reclaim all VAT on supplies you buy for construction. Labour and supply and fix contracts should charge you VAT at 5%, which you can later reclaim.

3. Reduced rate work. If the building has been unoccupied for two years, or you are changing the number of residential units (i.e. a house into flats) then you only have to pay VAT at the reduced rate - 5%.

4. Listed buildings: you pay VAT at the full rate on repairs, whilst alterations are zero-rated. Strange but true. You may be able to apportion the VAT on the whole job, by prior agreement with HMRC.

5. Domestic building work (inc granny annexes and outbuldings). Repairs, maintenance, improvements and alterations all attract VAT at the full rate.

The definitive rulebook on all this is VAT Notice 708, an 109-page behometh. Selfbuild reclaim forms are now known as VAT notices 731 (N) for new builds and 731 (C) for conversions.

Final thought. It's a great shame the Coalition hasn't thought to pay some attention to this VAT mess. Lots of good research has suggested that if the entire construction industry shifted onto the 5% reduced rate of VAT, the tax take would actually increase (because cash jobs wouldn't be so attractive to customers). It would be good news for the construction industry, good news for most of its customers (except the zero-rated housebuilders), good news for the Treasury, and great news for everyone who appreciates a little simplicity in life. And it would put new build and renovation on a level playing field.

But whilst Shapps, Clark and Pickles have been busy creating mayhem with the planning system and the social housing scene, the underpinning VAT tax regime remains a pea-soup of confusion.

C'mon guys. There is still time to get "radical" here.


  1. It'd also send a useful message if domestic DIY insulation work was 5% but energy started making its way up to full VAT rate.

  2. I'm trying to apply this 2 years unoccuppied rule but running into trouble. Any advice?

    I bought the house in question in July 2010 and I know it has been unoccuppied since then. However I need to prove that it was unoccuppied since May 2009 in order to start work in May 2011 and to apply the reduced rate of VAT.

    In the guidance it says to speak to utilities companies and council tax but they won't tell me anything about the house before I purchased it and say that they can't due to data protection.

    The empty housing officer has no record of the house because it wasn't causing a problem and therefore wasn't reported as being empty. So my question is how do I prove that the house has been unoccuppied since May 2009?

    from Electoral role there is nobody registered in 2009, 2010 and 2011 and I have a death certificate of the person who was registered there in 2008. Do you reckon that this is getting to be enough proof?

    Any thoughts would be really welcome!!



  3. Rob,

    It's a good question and I haven't a clue, is the short answer. I'll see if I can find out more. And if you do first, please plant the answer here.