VAT Q&A: renovation of an empty dwelling

In our regular VAT Q&A series, Croner Taxwise VAT adviser Tony Chamberlain examines whether reduced rate VAT is chargeable on renovation work on a bungalow which has lain empty for more than two years

Q: My client recently purchased an empty three-bedroom bungalow that has not been lived in for four years. The plan is to spend £30,000 extending and refurbishing the property into a four-bedroom house, which he and his family will move in to. He has the skillset to do some of the renovation work, so will be buying in some of the materials and will also be acquiring the services of various contractors. As the property has been empty for more than two years will the contractors be able to charge my client the reduced rate of 5% VAT which the client will be able to claim back, together with VAT incurred on materials purchased himself, via the VAT DIY housebuilders’ scheme?

A: Firstly, considering the reduced rate, the contractors will be able to charge this to the client for their work refurbishing and extending the property. However, it is important to note that the scope of services included in the reduced-rating is much narrower than that for zero-rating the construction of a new dwellings.

The reduced-rated services are limited to work carried out to the fabric of the dwelling and include installing goods that are building materials (notably not white goods, carpets or fitted furniture), repairs (such as redecoration), or improvement (such as the construction of an extension or the installation of double -glazing).

You can also reduce rate works within the immediate site of the dwelling that are in connection with the:

  • means of providing water, power, heat or access
  • means of providing drainage or security
  • provision of means of waste disposal.

In order for a contractor to charge the reduced-rate, the client must provide suitable evidence that one of the two empty dwelling rules have been satisfied. Those rules are:

  • the first empty home condition applies to suppliers whose work starts before occupation (following a period of the building not being lived in for two years);
  • the second empty home condition applies to suppliers whose work starts after occupation. This rule applies where the following conditions are met:
  1. the two years immediately before the occupier acquired the dwelling it had not been lived in;
  2. no renovation or alteration had been carried out in the two years before the occupier acquired the dwelling (you can ignore minor works that were necessary to keep the dwelling dry and secure);
  3. services are supplied to the occupier - so subcontractors must standard rate the work;
  4. services take place within one year of the occupier acquiring the dwelling.

Acceptable evidence of a dwelling being empty can be obtained from electoral roll or council tax records, utility companies, empty property officers in local authorities, or any other third-party corroboration that can be considered reliable.

It should be noted that the reduced-rate only applies to the supply and fit of building materials. Materials purchased on their own will be charged at the standard-rate of 20%.

A claim for a  VAT refund under the DIY housebuilders’ scheme can be made by persons (individuals, partnerships or companies) who build a brand new dwelling or convert a non-residential premises into a dwelling, where they intend to occupy the dwelling themselves, or build on behalf of another, but the activity has not been carried out in the course or furtherance of business.

Clearly this scenario does not relate to a new build dwelling. Therefore, the question is whether or not it is subject to a non-residential conversion. A property is subject to a non-residential conversion, where the property is not designed as a dwelling, or where it is designed as a dwelling, has not been lived in for 10 or more years.

This is a separate test to the two-year rule for the empty dwelling reduced-rate, and can often be confused with it.

Therefore, while your client can be charged the reduced-rate on the work to the dwelling, it will not qualify for a DIY housebuilder scheme refund, because the property has only been empty for four of the 10 years required to be classed as a non-residential conversion.

Further information on the reduced-rate and empty dwelling rules is available in HMRC Manual VCONST07000 and the rules for a DIY refund claim in VCONST24000.

About the author

Tony Chamberlain is a VAT adviser at Croner Taxwise tel: 0844 892 2470

This article first appeared on Croner Taxwise

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