One thing is for sure – VAT is complicated. And VAT on building renovations is one of the more complicated topics.
Two other things we can be sure about: firstly, I am not a tax accountant so make sure you get proper advice (there are a number of specialists around who can help you with this); and secondly, trying to correct the situation after the wrong amount of VAT has been charged, seems to be very difficult. So it would be wise to get it right from the start.
The standard rate for VAT (or Value Added Tax) in the UK is 20%, so this can add a considerable amount to your renovation. So it is well worth investing some time in this subject. Not matter how boring it may seem!
There are exceptions to the standard rate where either a zero rate of VAT is due or a reduced rate (currently 5%). But this all depends on the time of renovation that you are undertaking.
You can find more information (a lot more information) on the HM Revenue & Customs site here: http://www.hmrc.gov.uk/vat/sectors/builders/construction.htm. Once you start looking into the material you will find that the definitive source is “VAT Notice 708: Buildings and Construction”. But before you get to carried and download it, you should note that it is 120 pages long!
Fortunately, there are some more understandable, and slightly shorter, texts available. You certainly might still need to dip into the official documentation for reference, but this is not where I would start. There is a great article in this month’s (Oct 2012) “Homebuilding and Renovation” magazine. You can access a version of the text online here: http://www.homebuilding.co.uk/advice/existing-homes/renovating/vat
Zero rated VAT
Building a new house attracts 0% VAT. The VAT is paid on goods and labour as the house is built and then a SINGLE claim is submitted to the Revenue and Customs to reclaim the VAT.
Converting a non-residential building into a dwelling also attracts VAT at 0%.
Reduced rate VAT (5%)
There are a number of categories of construction/renovation that attract a reduced rate of VAT.
- Renovating or altering an empty house or flat (assuming that it has been unoccupied for ten years or more);
- Converting a house into flats;
- Converting a residential building into a different residential units – for example combining two cottages into a single house.
The method of reclaiming the VAT here seems to be different – you provide evidence to the builder that you are eligible for the reduced rate of VAT and then you get charged (for labour and goods) at this reduced rate. Thus there is no VAT to be reclaimed at the end of the project. This sounds like a better approach, however, many builders do not seem to be aware of the rules and once the VAT is paid, it is very difficult to get it back.
There are exceptions to these rules, and it is not possible to get a reduced rate of VAT on everything (for example, architects fees attract the standard rate of VAT), so it would be wise to fully understand the rules before you embark on your project.
We had some questions when we looked into the details and the questions are here.