A key consideration of development budgets is the VAT incurred on the costs involved. This can take the form of a cashflow cost for “End-Users” of the buildings, i.e., paying VAT on the charges raised by the contractors and then recovering this via VAT returns. Or the VAT could represent an absolute cost if it is not recoverable in the hands of the developer.

It is crucial, therefore, that VAT reliefs which apply to certain elements of construction works are applied, where available. Two key VAT reliefs, and how they apply, are summarised below (this is not an exhaustive list of all such VAT reliefs). 

The reduced rate of VAT for conversion works

The reduced rate of 5% applies to works taking place in relation to qualifying conversions. All three qualifying conversions relate to creating dwellings. 

As an example of when this relief can mitigate VAT as a cost, if a developer intends to let dwellings, the rent received is likely to be exempt from VAT. Whilst this means no VAT should be applied to the rent received, it also means VAT on works to convert the building into the dwellings should not be recoverable and, therefore, is likely to represent an absolute cost to the developer.

The three types of qualifying conversion are summarised below.

1. Changing the number of dwellings that exist within a building. For example, converting a house into two flats.  
2. Developing a house for multiple occupation (HMO). For example, converting a house into an HMO.
3. Changing a commercial building into dwellings. For example, converting a disused pub into terraced houses.

There are limitations to the extent of the works which qualify for the reduced rate. For example, the following do not qualify:

• Works that do not affect the structure of the building, such as most decorating; and
• Professional services such as architects and surveyors.

 The 0% rate for energy-saving materials

Works relating to the installation of such qualifying materials in residential buildings, or building used for charitable purposes, currently qualify to be received subject to 0% VAT.

The 0% rate applies to the installation of:

• Controls for central heating and hot water systems;
• Draught stripping;
• Insulation (e.g., cavity wall or roof insulation);
• Solar panels;
• Wind and water turbines;
• Ground and air source heat pumps;
• Micro combined heat and power units; and
• Wood-fuelled boilers.

From 1 February 2024, this was extended to:

• Water source heat pumps.
• Batteries for storing energy converted from electricity; and
• Smart diverters.

The relief does not extend to acquiring such goods without installation services. For example, buying such items from a retailer should be subject to VAT at the standard rate. Zero-rating applies only if the developer is receiving the goods subsumed within receiving the installation services for such items.

How we can help

In our experience, there are still many occasions where VAT is paid by developers unnecessarily, that cannot be recovered

Our VAT team has vast experience assisting developers to identify and avail themselves of such VAT reliefs. We mitigate the risk of missed opportunities and of applying these rules incorrectly.   

If you would like to discuss this further, please don't hesitate to get in touch with myself or a member of our team by filling in the short form below.