The Home And VAT Overlap

Alan Pink looks at some situations where buying a home and reconstructing/refurbishing it is anything but neutral from a VAT point of view. 

It can generally be treated as axiomatic that the cost of buying and doing up a house for yourself is nothing to do with tax and one in which HMRC should take no interest. But this is by no means an inviolable rule. 

Here are a few case studies showing situations where you definitely need to know your tax stuff to make sure that the house isn’t far more expensive than it should be. 

I’d better start off by saying, in case any reader gets too excited, that the ‘vanilla’ situation where you buy a house and do work to it, so as to fit it for your own residence, is not one where there is any VAT angle to think about. For a start, you are not incurring expenditure by way of business, and secondly, the purchase and renovation of ‘old’ residential property would be firmly within the ‘exempt’ category for VAT in any event. However, there is a common situation, as illustrated in the case study below, where VAT steps in and can basically force your hand in making some fairly radical decisions. 

Mr and Mrs H have been looking for some time for their ideal home, which needs to be near the sea and also near the golf course. It also, obviously, needs to be not too expensive, but well-appointed for modern living needs. Unfortunately, there isn’t a property which comes anywhere near meeting all of these criteria in the town where Mr and Mrs H are looking. The best they can find is a small and scrubby 1930’s property, which hasn’t had much in the way of alterations since the day of outside privies, and in itself, as a house, is entirely unsuitable for their needs. But it’s perfectly sited, right on the edge of the golf course and with a sea view, and it has a large garden. 

Mr and Mrs H call in the architects, who propose enlarging the property by demolishing most of the interior walls and extending two of the exterior walls to produce a much larger footprint, with a completely new and larger roof on top. 

Where’s the VAT angle in this? Well, the answer is that the way these proposals have been made, there isn’t any! After talking through the matter with a VAT adviser though, Mr and Mrs H decide to go the whole hog; rather than pussyfooting around with keeping a bit of the existing structure, they decide to flatten it completely, and build from new, keeping only the foundations. The advantage of doing it this way is that all of the work in building a new house is now zero-rated for VAT because zero-rating applies to new construction (whereas it doesn’t apply to the conversion, alteration, or enlargement of an existing building). So, paradoxically or not, having done the figures they find that a complete demolition and rebuild is actually cheaper because the 20% VAT that would otherwise have applied now doesn’t. 

In Mr and Mrs H’s case, in the previous example, they got a building contractor to throw up their new house, confident in the knowledge that he would zero-rate his invoices on grounds of new build. Mr and Mrs B are more ambitious, or perhaps foolhardy. They have decided that they will actually build the house themselves, with their own fair hands. Specialist trades such as gas and plumbing will, of course, be bought in, but the vast majority of the construction work is something they are confident (perhaps foolishly confident) that they can do. 

On the face of it, there is a problem for Mr and Mrs B, which Mr and Mrs H won’t be encountering. This is the fact that they aren’t registered for VAT themselves and, therefore, aren’t in a position to claim back the tax on all of the building materials they buy through the normal channels. Even though the materials are going towards a new build house, the builder’s merchants still have to charge the full 20% VAT. 

Fortunately, those making the rules have thought of that. You can register as a ‘DIY builder’ and get a pack from HMRC, which will enable you to claim back the tax. But beware, the requirements are quite bureaucratic and include time limits whereby, if you miss them, you can end up forfeiting your right to a VAT reclaim. 

This is an area where there is a lot of ignorance of the tax reliefs available; including on the part of builders. Mr and Mrs P buy a large Victorian house which is currently, at the time they buy it, disposed as a basement flat and a three-floor maisonette above that. The conversion was done a few years ago in a pretty crude DIY style. They’ve managed to buy both halves at once though, and plan to put the house back into a single-family home. So, they employ a builder to do the work of reconverting the property, which is a reasonably extensive job. It isn’t until after a couple of stage invoices have been raised by the builder, and paid, that Mr P reads somewhere that there is a VAT relief for conversions. 

In fact, there are a number, but the one which is most often found in practice, arguably, is the ‘changed number of dwellings conversion’. Any work done in the course of such a conversion qualifies for the 5% rate of VAT, not the normal 20%. In the case of Mr and Mrs P’s house, the conversion is changing a property which has two dwellings in it to a property which only has one. So, this is a changed number of dwellings. As is often the case in practice, the builder needs some convincing that he should credit out his invoices, which have 20% VAT on them, and reinvoice with only 5%. After all, if there’s anything wrong with this logical conclusion that Mr P has come to, it’s the builder who is vulnerable to attack by HMRC, and not the customer. Fortunately, though, after checking with his accountant, the builder agrees to do the reinvoicing at the lower rate. 

As the name of this relief implies, any change at all in the number of dwellings in a property, in either direction, will qualify the work for the relief. Mr and Mrs P’s example was of a situation where the number of dwellings goes down, but the relief is equally applicable where a house is turned into a number of flats, for example. The logic also applies where the number of dwellings either before or after the work is zero. 

So, if you buy an old barn or oast house (if there are any left unconverted) and turn it into a dwelling, you’ll be able to claim to pay the 5% rate of VAT rather than the 20%. In principle, of course, the logic also applies if you take a dwelling and convert it into a commercial property, although that’s something one finds very rarely in practice. 

Practical Tip: 

The main point is: don’t be fobbed off by a builder who won’t listen and insists on continuing to charge you the full rate of VAT.