There are certain circumstances when building work is subject to the lower VAT rate of 5%. Here we explain when and how to apply the 5% vat rate on building services.
When to Apply the 5% VAT Rate on Building Services
The lower rate applies in these cases – renovating residential property which has remained empty for over two years. Where a change in the number of dwellings within a property; dividing a property up into flats for example. Converting a commercial property into residential use, this would apply to a barn conversion. Or converting a single household residence into a house of multiple occupation, this means a residential property which has common areas that are shared by more than one household, for example bedsits with a shared entrance hall. Conversions to relevant residential buildings such as care homes. Where any of these cases is true the 5% VAT rate applies to building services and related materials, but not to building materials purchased separately.
When 5% VAT Rate Does Not Apply
Where these rules are brought into question is when the conversion is not as straightforward as the examples listed. For instance a property consisting of two flats that you convert into a single house – this is technically a change in the number of dwellings from two to one, so the 5% rate applies. However, if you have a block of flats over three storeys, containing one flat on each floor, which you convert into five flats, two on the ground floor, two on the first floor and one on the second floor, then the 5% VAT rate only applies to the works on the ground and first floors. You have to evaluate the project on a floor-by-floor basis, so the work to the second floor is subject to 20% VAT.
5% VAT Rate Certificate
A 5% VAT Rate Certificate is required to prove that the 5% VAT rate applies in the case of a renovation of a ‘relevant residential’ building, which has been empty for over two years, or the conversion of a property into a ‘relevant residential’ building. Conversion could be either from a non-residential building to residential, or from another type of residential property, for example a house divided into flats or multiple occupancy. The classification of ‘relevant residential building’ applies to residential children’s homes, student or school accommodation, care homes for the elderly, or other people in need of residential care, hospices, residential accommodation for members of the armed forces or a convent or monastery. When a construction firm undertakes a renovation or conversion on one of these classifications of property, you will need to obtain a certificate to support the application of the 5% VAT rate.
How to Provide Proof that the 5% VAT Rate Applies
For construction company to apply the 5% VAT rate to eligible building works as outlined above, the supplier needs to provide proof that they have applied the 5% VAT rate correctly. A certificate isn’t always requested but in order to keep HMRC happy, you need to be able to provide evidence if asked. The type of evidence you can provide, depends on the circumstances. When renovating a property which has been empty for over two years, you can request confirmation from the local authority ‘Empty Properties’ office. If your local authority does not provide this service you can refer to council tax records for this proof. When you are making a change to the number of dwellings, or a conversion from commercial to residential use, or into a house of multiple occupation, copies of the planning permission and the architect’s plans act as proof that the 5% VAT rate applies.
Even if you obtain a certificate, HMRC says that a supplier must additionally take all reasonable steps to confirm the validity of the certificate. This includes corresponding with your client to confirm the details of the use of the building, which should be retained within your records for future reference. Fortunately HMRC will recognise that you have acted in good faith if all reasonable steps have been taken to obtain proof that the 5% VAT rate applies.
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At Prestige Business Management we can help you understand and manage your VAT and tax obligations. Find out what we can do for you. Call us today on 0203 773 2927.