T he amount of VAT which can be significant component of the overall cost of the project. For the property developer or investor, the VAT cost can erode their return on investment and for the home owner can place a strain on personal finances. Thankfully, there are a number of circumstances in which building works should be either charged out at a 5% VAT rate or even at a 0% vaT rate (no vaT). However, due to the complexity of the VAT legislation, a contractor may mistakenly apply a 20% VAT rate to such works, or the contractor may choose to charge VAT at 20% to protect themselves from a potential assessment by HMRC if they are unsure whether a lower rate should be applied. Construction of a new build When undertaking a new project it is important to be aware that any works incurred in relation to the construction of a new residential property should be charged at a 0% VAT rate. In other words, the builder will still need to provide a VAT invoice but no VAT is charged on the works carried out. It is important to remember that works carried out by any sub- contractors such as electricians or plumbers in relation to such construction and any building materials supplied in the course of the construction which are incorporated into the fabric of the building should also be charged at a 0% VAT rate. If the works involve the demolition of an existing property prior to the construction of a new house, it is important that any such existing building is demolished in its entirety before such works are commenced. Otherwise, the works could be seen as a conversion of an existing building. incurred on engaging contractors to carry out building works can be a
But what happens if the wrong VAT rate is applied by the contractor? If the wrong VAT rate is applied by a contractor and this is discovered after the invoice has been paid, there is no facility for the recipient of the works to obtain a refund of the overpaid VAT from HMRC, unless the person is building or converting a home in which they will live. Instead, a refund would need to be obtained from the contractor who carried out the works. This may be problematic in many cases, particularly if the relationship with the contractor sours during the course of the project. The rules around residential property projects are complex, and there a number of conditions which need to be satisfied in order for a lower VAT rate to be applied. However, it is important that both the contractor and the client are clear at the outset of any project on the correct rate of VAT which should be applied. Gavin Birchall leads Scrutton Bland’s Property and Construction sector group and is a Tax Director at Scrutton Bland . If you have any queries on the issues raised by this article please call any member of our Property and Construction Tax Team (jason Fayers, Gavin
If you are engaging an architect, project manager, surveyor, or a person acting as a consultant their services are still required to be charged at a 20% rate. However, if the builder is engaged on a “design and build contract” so that the builder is responsible for commissioning an architect to carry out the design of the property, the services of the architect can be wrapped up within the 0% VAT rate applied by the contractor. What about converting a residential property? In these circumstances a 5% VAT rate should be applied to construction services which are supplied in relation to :- • the conversion of a non- residential building such as an office, farm building or warehouse into flats or houses; • the conversion of a house where additional dwellings are created; • works carried out to residential property which has been empty for more than 2 years Refurbishment of residential properties A 20% VAT rate should apply to any refurbishment works carried out to an existing residential property where use remains the same after the works. For example, where there is one house before the works and one house after the works (except if the house has been empty for 2 years), a 20% vaT rate should be charged.
Birchall or Sarah Gamblin) on 01473 267000 or 01206 838400 .
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