Reclaiming VAT on property conversions

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How to reclaim VAT on conversion of commercial premises to residential use


Aimed at renovators and developers and first introduced in 2001 and then extended in 2002 is the urban regeneration scheme.  Quite often overlooked it is still little known by landlords, builders and developers alike to this day. As a result, a lot of landlords who are renovating properties are still paying the full 20%  in error and missing out on saving 15% on refurbishment costs.


What is the scheme

Known originally as the urban regeneration scheme it actually applies to all qualifying buildings wherever they are located. The aim of the scheme is to provide a reduced rate of VAT (5%) on work carried out to upgrade existing housing stock.

The reduced rate of 5% applies if you are:

Converting a non-residential building into a residential building, for example, a barn or warehouse conversion;
You change the number of “single household dwellings” within a property, for example, convert a large old house into 2 flats, convert a bed-sit back into a single house;

Convert flats or a house into a bed-sit;

Refurbishing a residential property that had been empty for three years or more; or
Convert premises for use solely for a ‘relevant residential purpose’, for example, a children’s or old peoples home (but the developer has to provide a certificate to the builder to secure the lower rate of VAT).

There are however some complications. For example, if you are refurbishing a block of flats and change the number of flats on some floors but not others then the reduced rate will only apply to certain parts of the building.

As an example let’s say you have a three storey building with two flats on each floor.

The top floor is converted from 2 flats into 1 flat, so it is eligible for the reduced rate of 5% because you have changed the number of flats.

The first-floor flats are simply refurbished but no change to the number of flats and thus VAT on the work carried out on this floor cannot be claimed at the reduced rate.

The ground floor is converted from 2 flats into 3 flats. The 5% reduced rate of VAT can, therefore, be claimed on the work done.


Important exceptions

The scheme only applies to properties capable of separate disposal, i.e. each house or flat can be sold separately (even if you are only ever going to rent them out), so it will not apply to the construction of extensions and “granny flats”.

The 5% rate only applies to the services of the builder, you cannot buy materials at the reduced rate, they will still be supplied with 20% VAT so if you do the work yourself the scheme will not apply to you.

Details of the scheme are contained in VAT Notice 708. Many builders will not have heard of the scheme. Visit the HMRC website and get a copy of the leaflet to show him the relevant sections.

If you would like to know more then do get in touch. The potential savings could be quite substantial and even on smaller projects, the savings can still be hundreds of pounds.


© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a, S Thandi or M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.

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