Residential conversions – are you paying too much?

29 May 2018

Maximising income from assets has never been more important. With this in mind, we are seeing an ever-rising level of diversification across our clients - a common diversification being the conversion of redundant farm buildings into residential dwellings. Here we look at the reduced rate of VAT connected to residential conversions and ask, are you paying too much?

The construction of a new building and work to an existing building is normally standard-rated. However, the conversion of a non-residential building into a qualifying dwelling can qualify for the reduced, 5% VAT rate when certain conditions are met.

Qualifying conversion

There are various types of conversion that are ‘qualifying conversions’. The most common one we see is conversion into a ‘single household dwelling’. Here, a qualifying conversion is carried out when a building, or part of a building, is converted into a greater or lower number (but not less than one) of ‘single household dwellings’. Where the number of ‘single household dwellings’ remains unchanged, the reduced rate is not available.

A qualifying conversion, therefore, covers the conversion to residential use of a property that has never been lived in, such as a redundant farm building.

Single household dwelling

The term ‘single household dwelling’ can cause confusion in itself. Simply, the term means self-contained living accommodation that is designed for occupation by a single household. It must, however, have no provision for direct internal access to any other dwelling or part of a dwelling. This, therefore, rules out, for example, most ‘granny’ annexes which have a connecting access to the main farmhouse - a point to consider at the design and planning stage.

What can be covered by the reduced rate?

Other than installing goods that are not building materials, any works of repair, maintenance or improvement carried out to the fabric of the building can be covered by the reduced rate of VAT. This would cover redecoration, construction of an extension and installation of double glazing, to name but a few. Works within the immediate site of the premises being converted can also qualify for the reduced rate of VAT. These include works to provide water, power and drainage.

Certain works are specifically excluded and must be standard-rated.

These include:

  • Installation of carpets, fitted bedroom furniture, etc.
  • Erection and dismantling of scaffolding
  • Hire of goods 
  • Provision of professional services e.g. architect fees, surveyors and  consultants

VAT on buildings and construction is a very complex area. If the building is to be your home, VAT can largely be recovered under the DIY self-build scheme. If the existing building is being demolished first, the rules are different again. Consideration of VAT at the outset is vital, before plans are finalised, certainly before planning permission is applied for, and a builder chosen. Ellacotts are here to help you ensure you are not paying too much - the potential savings from getting VAT right can be enormous.

Please contact Kerry O'Reilley for more advice on this matter.