The VAT legislation in relation to the reduced rate of VAT for residential renovations and alterations is VATA 1994, Schedule 7A, Group 7. The relief allows the supply, in the course of the renovation or alteration of qualifying residential premises, of qualifying services related to that renovation or alteration.
‘Qualifying residential premises’ means a:
- single household dwelling;
- multiple occupancy dwelling, such as bed-sits;
- building (or part of a building) which, when last lived in, was used for a relevant residential purpose, and after the renovation or alteration will be used solely for such a purpose;
- building (or part of a building) which, when last lived in, was one of a number of buildings on the same site that were used together as a unit for a relevant residential purpose, and after the renovation or alteration will be used solely for such a purpose.
Details of the relief can be found in section 8 of VAT Notice 708: Buildings and Construction https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708#section8 .
The relief is aimed at bringing existing housing stock back into use , and allows the reduced rate of VAT to be charged for construction services providing works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the dwelling. Building materials supplied with the construction services are also subject to the reduced rated.
In order for the relief to apply, the dwelling or other eligible premises must not have been lived in for a period of at least 2 years before the renovation work starts, but as you have alluded to in your question, for single household dwellings there is an allowance for the works to be reduced rated even if the building is occupied.
There are 2 empty house rules or conditions applying to the VAT relief.
First rule – applies to all qualifying residential premises.
If the ‘qualifying residential premises’ have not been lived in during the 2 years immediately before the building contractors work starts, all of their work is reduced-rated. This is the case even if the premises start to be lived in again while they are carrying out their work. The occupier must move in on a day after the contractor starts their work. This applies to both main contractors and sub-contractors.
If however, when the contractor’s work starts, the premises are already being lived in, or have been lived in during the previous 2 years, all of the work is standard-rated.
Second rule – This applies only to Single Household Dwellings
A building contractor can reduce rate services of the refurbishment or alterations to a ‘single household dwelling’ where all the following conditions are met:
- The 2 years immediately before the occupier acquired the dwelling it had not been lived in.
- No renovation or alteration had been carried out in the 2 years before the occupier acquired the dwelling (you can ignore minor works that were necessary to keep the dwelling dry and secure).
- The contractor’s services are supplied to the occupier – so if you are a subcontractor you must standard rate your work.
- Your services take place within 1 year of the occupier acquiring the dwelling.
This exception to occupation will not apply to the renovation or alteration of multiple occupancy dwellings or buildings intended for use for a relevant residential purpose.
In your client’s case, the house is a single household dwelling which has not been lived in for 3 years prior to the couple’s acquisition of the house and there has been no renovation of alteration work carried out since the former occupant died. As long as the works start within a year of the clients purchasing the building, any building contractors working directly for the clients will be able to reduce rate their services. Sub-contractors working for the main contractors will not be able to reduce rate their services, however VAT registered main contractors will be able to recover the VAT charged at standard rate to them by their sub-contractors, and bill on to the occupiers at the reduced rate.
Please share this article with your clients
Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.