The 5 per cent VAT rate on conversions and empty homes, step by step
On a small residential development, the reduced rate of VAT is usually worth more than every other tax planning idea combined, and it is the one most often lost. It is not a refund you claim later; it is the rate your contractor is obliged to charge, so it has to be settled before anyone lifts a spade. This is the order the decisions actually arise in, from establishing what the building is to recovering the tax at the end.
Write down what the building is now and what it will be
Every relief here turns on a comparison between two states of the same building, so the first task on a conversion is not really a VAT question. It is a record-keeping one. Establish, with evidence, how many self-contained dwellings the premises contain today, when anybody last lived in them, and what the finished scheme will contain. Schedule 7A Group 6 of the Value Added Tax Act 1994 defines the reduced rate by reference to that before and after picture, so a comparison you cannot evidence is a relief you will lose. Open a project file on day one: the title, the planning consent, photographs as found, and whatever can be gathered about occupation history. All of it is harder to assemble once the scaffolding is up.
The four routes into the 5 per cent rate
Four routes exist, and they are separate. The first three sit in Schedule 7A Group 6 and cover conversions. A changed number of dwellings conversion is the workhorse: an office turned into six flats, a house turned into two, two flats knocked into one. What matters is that the number of single household dwellings afterwards differs from the number before, and that no part of the premises is left containing the same number as it did at the start. A house in multiple occupation conversion applies where the premises contained no multiple occupancy dwellings beforehand and the finished premises consist only of them. A special residential conversion applies where premises last used for something else become a building used solely for a relevant residential purpose, a care home or student accommodation say; it needs a valid certificate from the customer. Schedule 7A Group 7 is different in kind. It reduces the rate on renovating or altering qualifying residential premises that have not been lived in for two years, and nothing about the building need change at all; a tired house brought back into use qualifies purely because it stood empty.
Proving the empty period is the customer's problem
HMRC accepts evidence of non-occupation from the Electoral Roll and council tax records, utility companies, a local authority Empty Property Officer, or any other reliable source. For this two year relief the officer's letter must certify that the property has not been lived in for two years, and then no other evidence is needed. A ten year letter does a larger job, described below. The facts sit with the customer, so a contractor asked to invoice at 5 per cent will want the file first. Three traps recur. The test is when the premises were last lived in, not when they became empty, so a brief occupation eighteen months ago is fatal however derelict the building looks. If the premises start to be lived in while works run, sub-contractors who begin after that point must charge 20 per cent, although a main contractor already engaged may continue at the reduced rate. And the condition for a buyer who acquires an empty home and moves in has its own requirements: works within one year of acquisition, one of the first occupiers being the acquirer, and no renovation in the two years before acquisition beyond minor works to keep the place dry and secure. Sub-contractors cannot use it.
A rate your contractor charges, not a refund you claim
This is the commercial heart of it. The 5 per cent is not a rebate. It is the rate at which the contractor is obliged to account for VAT, and if 20 per cent is charged instead, the extra fifteen points do not become recoverable merely because the correct rate was lower. HMRC is explicit that VAT at the wrong rate cannot be refunded; the remedy is for the supplier to correct the transaction, refund the overcharge and adjust its own VAT account. In practice that often fails, because the supplier may have ceased trading, or the correction may fall outside four years from the date of the supply, after which it cannot adjust its account and so will not refund. Settle the rate before works start. Put it in the contract, hand the evidence pack to the main contractor, and make sure it reaches every sub-contractor, because each supply stands or falls on its own facts.
What the 5 per cent covers, and what it never touches
The relief covers qualifying services together with building materials supplied and incorporated by the person doing the work. That second limb is the one to plan around, because the statutory wording reaches materials supplied by the very person supplying the qualifying services and nobody else. Materials the customer buys direct are standard-rated in the customer's hands, so a self-supplied kitchen, boiler or bathroom suite carries 20 per cent whatever rate the labour attracts. Where those numbers are large, buying through the contractor is worth real money. Two costs stay at 20 per cent whatever you do. Architectural, surveying, consultancy and supervisory services are always standard-rated, so the design team's invoices never come down. Goods outside HMRC's definition of building materials are the second, carpets and most fitted electrical appliances among them, standard-rated even when a qualifying contractor installs them. Neither is a drafting problem; both are budget lines to price at the outset.
Ten years empty is a different, and much better, relief
If a building has not been used as a dwelling or for a relevant residential purpose in the ten years before the grant, it counts as non-residential for the purposes of Schedule 8 Group 5, even though it looks like a house. That opens zero-rating rather than the reduced rate for a person converting it and then making the first grant of a major interest, meaning a freehold sale or a lease over 21 years. Ten years empty is therefore worth far more than two, which is why that ten year letter matters. An owner occupier converting a home for themselves has no business through which to recover VAT. Section 35 of the Value Added Tax Act 1994 gives them a refund scheme instead, for works carried out lawfully and otherwise than in the course or furtherance of any business. Read its limits: the conversion limb reaches only a non-residential building or part, so an owner splitting an ordinary house into flats is outside the scheme entirely. Claims go online or on form VAT431C, and for work completed on or after 5 December 2023 they must be made within six months; before that date, three months.
Illustrative worked example: the same job at two rates
The following is illustrative only, and not drawn from any client matter. Take a former office converted into four flats. The contractor's price for its services and the materials it supplies and fits is GBP 400,000. At 20 per cent the VAT is GBP 80,000; at 5 per cent it is GBP 20,000, a difference of GBP 60,000. The design team charges GBP 30,000 plus VAT of GBP 6,000, the same on either footing. The developer also plans to buy GBP 15,000 of sanitaryware directly, carrying GBP 3,000 of VAT; routed through the contractor and fitted by it, the same goods carry GBP 750, saving a further GBP 2,250. The relief plus one purchasing decision therefore moves GBP 62,250 of VAT on a spend of GBP 445,000. Whether that is money kept or merely money borrowed depends on the exit. Sell the flats as a zero-rated first grant and the VAT charged is recoverable, so the reduced rate is worth cash flow rather than the full sum. Let them instead and the supply is exempt, nothing is recoverable, and the whole GBP 62,250 is a permanent saving.
Selling recovers the VAT, letting does not
The exit decides recovery, and it turns on what the building was before you started. Where a non-residential building is converted into dwellings, the first grant of a major interest by the person converting it is zero-rated, and a zero-rated supply is a taxable one, so the input tax attributable to it is recoverable. Where the building was already residential, a house divided into flats for instance, that route is closed: the first grant is exempt and the VAT stays in the project as cost. This is precisely where the ten year rule pays, because it can turn a long-empty house into a non-residential building and reopen zero-rating. Letting is exempt on any footing, so a scheme selling some units and keeping others is partly exempt from the outset and needs its recovery position modelled early. Watch the purchase too: where a seller has opted to tax, the buyer can disapply the option by certifying on form VAT1614D an intention to use the building as dwellings, solely for a relevant residential purpose, or to convert it with that use in view, and that certificate must reach the seller before the price is legally fixed, on exchange of contracts say. Three questions, then: what rate must each supplier charge, who holds the evidence, and does the exit allow anything to be recovered.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.