VAT Treatment on Property Conversions

Property conversions offer unique opportunities for preferential VAT treatment under specific conditions. While construction work is typically standard-rated for VAT purposes, certain types of property conversion or renovation may qualify for reduced VAT rates or even zero-rating. This article focuses on the VAT implications for property conversions, specifically under the Value Added Tax Act 1994 (VATA 1994).

It’s important to note that a ‘building’ may also refer to ‘part of a building,’ and services such as architectural design and surveying are generally standard-rated. All references herein are made to the VATA 1994 unless otherwise indicated.

Defining Conversion and Construction

A ‘conversion’ occurs when part of an existing structure is incorporated into the new build. This contrasts with ‘construction,’ where the new structure does not utilize any above-foundation parts of an existing building. An exception is made for retained party walls or façades, which do not negate the possibility of treating the work as construction.

Residential Conversions

For a ‘qualifying conversion,’ a reduced rate of VAT can be applied to qualifying services, as outlined in Schedule 7A, Group 6. Qualifying services broadly cover work related to the building’s structure and associated site services (e.g., water, power, and heating). Additionally, building materials supplied by the person providing these services can also be reduced-rated, provided they are incorporated into the building.

Three types of qualifying conversions:

1. Changed Number of Single Household Dwellings: A conversion where the number of single household dwellings post-conversion differs from the number before the conversion.

2. House in Multiple Occupation Conversion: A conversion where multiple occupancy dwellings are created, but none existed before the conversion.

3. Special Residential Conversion: A conversion where the building is intended for a relevant residential purpose post-conversion and was not previously used for that purpose. Relevant residential purposes include care homes, children’s homes, and hospices.

Example 1: Changed Number of Dwellings

Annette converts a building with six apartments into three apartments. Since the number of dwellings has changed, this is considered a qualifying conversion.

Example 2: Multiple Occupancy Conversion

Benedict converts a small warehouse into two bedsits, creating multiple occupancy dwellings where none existed before. This qualifies as a multiple occupancy conversion.

Example 3: Special Residential Conversion

Chloe purchases a factory and converts it into a care home for people recovering from drug dependencies. Since the conversion is for a relevant residential purpose, Chloe’s builder can apply the reduced VAT rate, provided a certificate is issued confirming the intended use.

Renovations of Empty Buildings

Reduced VAT rates also apply to renovations of properties that have been unoccupied for at least two years. The conditions for qualifying services are similar to those for residential conversions. The reduced rate applies to properties previously used as dwellings or for relevant residential purposes, provided a certificate confirming their intended use is supplied.

Example 4: Renovating an Empty Property

Diana renovates a multiple occupancy dwelling that has been unoccupied for more than two years, as verified by council tax records. Her builder can apply the reduced VAT rate, provided the property remains unoccupied during the renovation.

Conversions for Housing Associations

While most conversions attract the reduced VAT rate, conversions carried out for housing associations can be zero-rated. This applies when a non-residential building is converted into dwellings or for relevant residential purposes. The supply must be made to a housing association as defined in the legislation. Building materials incorporated during the conversion will also be zero-rated. Non-residential buildings, for this purpose, include those not used as dwellings or for relevant residential purposes for at least 10 years.

Subcontractors, however, do not qualify for zero-rating since they supply their services to the contractor, not directly to the housing association.

Building Materials and VAT Treatment

Items incorporated into a building during a conversion generally follow the VAT treatment of the main service, provided they qualify as ‘building materials.’ Non-qualifying materials must be standard-rated.

Conclusion

Navigating the VAT treatment for property conversions can be complex, particularly when only part of a building is involved. For further details, consult VAT Notice 708, which provides comprehensive guidance on the subject.

For more information on property income tax, you can refer to our Property Income Tax Guides.

If you’re considering setting up a limited company for property investment purposes, our Limited Companies section offers valuable insights.

Additionally, our LTT Calculator can assist you in estimating Land Transaction Tax liabilities for property purchases.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG