Saving VAT on property conversion costs

June 22nd 2023

Susan owns an unoccupied commercial property. She plans to convert it into two flats on the upper floors and a retail unit on the ground floor, which she’ll let. How much of the VAT paid on the conversion costs can she reclaim? VAT Expert John Craig explains.

There is good news, even though Susan is not registered for VAT, she can take advantage of a VAT break which applies to conversions to the use of a property where the work is carried out by a third party, e.g. a builder. The VAT break doesn’t allow her to reclaim VAT on costs but instead the builder doing the work is required to charge just 5% VAT for the cost of services and materials.
What does the VAT break apply to?|

The VAT break only applies to qualifying work, specifically:
• Converting non-residential buildings, e.g. a shop into a dwelling.
• Changing the number of dwellings in a property, e.g. where you convert a house into two flats, or four flats into two. It doesn’t need to be an increase; a reduction also qualifies.
• Renovating and bringing back into use a dwelling that’s been unused for more than two years.

To ensure the conditions of the VAT break are met, Susan should provide the builder with a copy of the planning permission or other documents that prove the nature of the work qualifies for the VAT break.

This VAT break doesn’t apply to costs for materials bought directly by Susan. If she buys materials, e.g. light fittings, for use in the conversion she’ll pay 20% VAT and won’t be entitled to recover any of it even if she’s VAT registered.

To get around this, Susan should, where feasible, ask the builder to purchase the fixtures and pass the cost on to her as part of the conversion work. That way she can save 15% VAT as the builder only needs to charge 5% on the items purchased.

Shop renovation
The bad news for Susan is that the 5% VAT break doesn’t apply to the cost of renovating the retail unit. However, this does not mean that she has to pay 20% VAT on the costs relating to its renovation.

Susan can recover VAT if she “opts to tax” the property and then registers for VAT as an “intending trader”.

Opting to tax and registration
Opting to tax and registering will entitle Susan to reclaim the VAT paid on the retail unit renovation costs, whether it’s charged by the builders or she incurs the VAT direct on purchases she makes. It also means that she’ll be entitled to recover VAT paid on future costs relating to the shop and, using the de minimis rules, possibly a proportion of that relating to the flats. The drawback with opting to tax is that she must charge VAT to the tenant she lets the shop to, but not to the tenants of the flats, that rent is VAT exempt. She’ll also have to make quarterly VAT returns.

Whilst Susan can’t reclaim any of the VAT paid on the cost of converting the property to dwellings, the builder only has to charge 5% (instead of 20%) because of a special VAT break. She can reclaim the VAT on the work and materials relating to the retail unit if she “opts to tax” the property and registers for VAT.

Our team would be more than happy to discuss this or any other VAT questions you may have and can be contacted here.

Related Services