It’s not uncommon to see a VAT-registered contractor incorrectly charge a property owner 20% VAT when the reduced 5% VAT rate should be charged.

If you are the contractor it is important that you don’t fall into this trap, because the 5% VAT rate on residential property is not ‘optional’, and you can’t ‘play safe’ by charging the full rate if the full rate doesn’t apply. In any case, the the property owner certainly won’t want to be overcharged. You must be equally careful not to charge VAT at 5% when the correct rate is 20%.

If you get it right you could gain a significant advantage of your competitors who factor in the higher VAT rate incorrectly and overprice themselves.

Getting it wrong will have one or more of the following adverse financial impacts:

a) an increase in costs for the property owner 

b) the property owner seeking to recover overcharged “VAT” from the contractor 

c) a penalty being levied by HMRC.

So how do you know which rate to charge? In summary,  the 5% rate may apply if:

1. a non-residential building (such as a warehouse) is converted into flats,

2. a conversion results in a change in the number of dwellings (eg, on conversion of 1 house into 2 flats, or 2 flats into 1 house)

3. a residential property which has not been occupied for more than two years is renovated or altered.

However, and as is usually the case, there are a lot of detailed 'conditions' to be aware of.  See HMRC's VAT Notice 708 for further detail, Amongst other things, works must be carried out in accordance with any necessary planning permissions, building control approval must also be obtained where appropriate, and the definition of what constitutes a ‘dwelling’ for the purposes of the reduced rate is very specific. 

We’re here to help if you need advice.