The reduced rate of VAT (five per cent) was first introduced way back in May 2001 in respect of residential conversions. It was extended on June 1 2002 to include other specific supplies made in the construction industry.

Despite being introduced so long ago many sub-contractors and even contractors are unaware of the details. They do not take advantage of charging VAT at the lower rate and continue to charge it at 17.5 per cent.

By charging VAT at 17.5 per cent when it should be charged at five per cent can make your business uncompetitive particularly when the customer is unable to recover the VAT.

In this article we highlight when the five per cent rate is applicable.

Conversion of non-residential buildings to dwellings
The reduced rate applies to work in the conversion of a non- residential building into a dwelling or dwellings. This would include for example the conversion of a barn, offices or a hotel. It also includes the conversion of a building to a dwelling, which although originally designed as a dwelling, has not been used as such for the past 10 years.

Conversion of a dwelling into a different number of single household dwellings
The new rate also applies to the work where a building currently used as a dwelling is converted into a different number of single unit dwellings or to multi-occupancy units such as bed-sits. Either the number of dwellings within the building is increased or decreased. Thus a house might be split into flats or bed-sits or alternatively the reverse situation might occur. The dwelling units must be self-contained without internal access from other dwellings. They must not be prohibited from separate use by planning consent or other provision.

The five per cent rate applies to works in connection with that part of the building that is actually converted. For example the splitting of a top floor into two dwellings does not mean that work on a lower floor may be at the reduced rate. The work must relate to the conversion of the building. Other work will be standard rated or may qualify under the three year unoccupied (empty) rule as explained below.

Conversion for use re a relevant residential purpose
The five per cent rate applies to the conversion of any building to be used for a relevant residential purpose. The result however must be the creation of an entirely new ‘residential purpose building’ such as a ‘care home’ or similar. You need to hold a certificate from the customer to enable the reduced rate to apply to work in connection with such a building.

Renovation or alteration of ‘empty’ residential premises
The renovation or alteration of any premises which previously had been used as a dwelling or dwellings or for a ‘relevant residential’ shall also qualify for the reduced rate subject to the following conditions.

Work shall not qualify for the reduced rate unless the property has been empty, that is, unlived in for at least three years prior to the date you start the work. After the work is completed the property must continue to be used as a dwelling(s) or for a relevant residential purpose. You must also hold evidence to support the three-year non-occupancy.

Normally the customer will be able to supply such evidence that for example could simply take the form of confirmation from the Local Authority. If you, the contractor, own the building that it will your responsibility to get the required proof from the Authority.

Materials supplied with construction services
Where work qualifies at the lower rate then this rate will also apply to building materials used in carrying out the work. The reduced rate applies only to normal builders materials and items of a kind ordinarily installed by builders subject to the normal limitations.

Barry Hincks
Qdos Consulting

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For complete peace of mind Qdos can undertake a comprehensive VAT Review service at your offices. During the visit one of our VAT specialists will discuss projects with which you have been involved and advise on the relevant VAT implications. Current and future projects will also be discussed so that you are up to date with the correct VAT treatment that needs to be applied from the outset with you also being in a position to plan ahead which can save you VAT too.

If you are interested in having a VAT Review or alternatively require just ad-hoc advice on a particular project in which you are involved please contact Barry Hincks on 01455 850000 or by e-mail on bhincks@qdosconsulting.com

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Susie Hughes
The Editor © Hardhatter 2007