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Converting commercial property to residential use? Get the VAT right before you start!

If you are considering converting a commercial property into residential use, there are a number of VAT issues to consider and it is essential to get the treatment right at the outset in order to avoid any nasty surprises and minimise the costs associated with the project.

Here, Gemma McCaldon-Gower in our Property and Construction team reminds you of the basics and urges you to get in touch if you are planning to convert a property into residential use so we can help you to structure the project in the most tax-efficient way.


What are the basic rules?

Generally, when work is carried out to an existing building, VAT is chargeable at the standard rate of 20%. However, a reduced rate of 5% can be applied in certain circumstances. One of these circumstances is where there is a conversion of a commercial building into a residential dwelling.

So, as a very simple example, if you are converting a non-residential building such as a warehouse into dwellings at a cost of £500k, failing to use the reduced rate could cost you an additional £75k.


In what circumstances does the reduced rate apply?

The reduced rate can also be applied in other circumstances. It applies to:

  • Conversion of a non-residential building into dwellings
  • Conversions involving a change in the number of dwellings within the building, for example, the conversion of a house which creates additional dwellings or the conversion of multiple occupancy dwellings into one house
  • The renovation of residential property which has been unoccupied for more than 2 years

The main condition for the reduced rate to apply, is that there mustn’t be any planning restrictions on the building which would prevent the property from being sold or used separately from any other land or building.  An example of this restriction could be a barn which could only be sold or used along with the associated farmhouse.


What does the reduced rate cover?

It covers costs relating to work to the fabric of the buildings including walls, roofs, floors, stairs, windows, doors, wiring and plumbing, the provision of facilities such as water, power, heat and drainage and the installation of fitted kitchen units, sanitary-ware, central heating and light fittings.

Also, if the builder undertakes the work and purchases materials on the owner’s behalf, they should charge VAT at 5% on both materials and labour. If the builder incorrectly charges VAT at the standard rather than the reduced rate, HMRC won’t refund the excess. It would be for the owner to recover the money back from the builders, so it’s important to get it right at the outset.


What isn’t covered by the reduced rate?

Costs for services such as architects and quantity surveyors, the installation of goods which are not building materials – for example, carpets or fitted bathroom furniture and costs relating to the hire of goods or scaffolding are not eligible for lower rating and chargeable to VAT at the standard rate.


Get it right at the outset

If you are planning to convert commercial property into alternative use, it’s imperative that the tax treatment is considered upfront so that you don’t pay too much VAT.  Whilst it is sometimes possible to correct errors retrospectively, suppliers may be unwilling to refund VAT incorrectly charged or might no longer be in business meaning that any VAT overpaid is lost forever. If you’d like to learn more, get in touch with our expert team today.

commercial property

The information was correct at time of publishing but may now be out of date.

Posted by Cowgills
25th November, 2022
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