Reduced rate VAT for landlords

by Robert Mellors

8:58 AM, 21st January 2019
About A year ago

Reduced rate VAT for landlords

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Reduced rate VAT for landlords

Businesses, tradesmen, and contractors, are overcharging VAT to customers.

Homeowners, property developers, and landlords, are routinely being charged VAT at the standard 20% rate, for works which should qualify for a reduced VAT rate.

Most accountants don’t pick up on this, or don’t even know about it, (I asked several accountants and some bookkeepers), so both the landlord (customers), and also the building contractors/businesses themselves, end up paying more VAT than they need to.

Reduced rates of 5% VAT (or zero rate) should be charged on some works, e.g.
Installation of energy saving materials, including TRVs (thermostatic radiator valves) and heating controls.
Renovation or alteration of some empty properties.
Converting commercial premises into residential premises.
Converting self-contained residential property into houses in multiple occupation (HMOs).
Alterations carried out to suit the needs of disabled people.

Where these reduced rates apply, they affect not only the labour cost of works carried out, but also the VAT applied to all materials used.

See “VAT Notice 708: buildings and construction” for full details, and stop overcharging/overpaying tax.

Robert

Editors Note:

This notice explains when building work/materials can be zero/reduced rating, when developers are blocked from deducing input tax, the issuing of certificates and time of supply rules.

1.4 What law is covered in this notice?

The Value Added Tax Act 1994, Section 30 holds that goods and services specified in Schedule 8 to the Act are zero-rated.

Schedule 8, Group 5 (as amended by SI 1995/280, SI 1997/50, SI 2001/2305, SI 2002/1101 and SI 2010/486) specifies when the construction (and the supply of building materials with those services), conversion of a non-residential building (and the supply of building materials with those services), sale, or long lease of a building is zero-rated.

Schedule 8, Group 6 (as amended by SI 1995/283, SI 1995/1625 (NI 9) and the Planning (Consequential Provisions) (Scotland) Act 1997) specifies when the alteration (and the supply of building materials with those services), sale, or long lease of a protected building is zero-rated.

The Value Added Tax Act 1994, Section 29A (as inserted by the Finance Act 2001, section 99(4)) holds that goods and services specified in Schedule 7A to the Act are reduced-rated.

Schedule 7A, Group 6 (as inserted by Finance Act 2001, section 99(5) and amended by SI 2002/1100) specifies when a residential conversion is reduced-rated.

Schedule 7A, Group 7 (as inserted by Finance Act 2001, section 99(5) and amended by SI 2002/1100 and SI 2007/3448) specifies when the renovation and alteration of a dwelling is reduced-rated.

Schedule 10, Part 2 (as amended by SI 2002/1102 and SI 2011/86) specifies when a taxable self-supply arises should the qualifying use of a certificated building cease or decrease or the building be disposed of.

The rules that ‘block’ developers from deducting input tax on goods that are not building materials are found in the VAT (Input Tax) Order 1992 (SI 1992/3222), articles 2 and 6 (as amended by SI 1995/281).

The special time of supply rules for builders are found in the Value Added Tax Regulations 1995 (SI 1995/2518), Regulations 89 and 93 (as amended by SI 1997/2887 and SI 1999/1374).

The rules for the self-supply of construction services are found in the Value Added Tax (Self-Supply of Construction Services) Order 1989 (SI 1989/472).

2. VAT liability

2.1 Construction services

The construction of a new building and work to an existing building is normally standard-rated. There are, however, various exceptions to this.

Information about these exceptions can be found at the following sections:

Construction Service Rate of VAT Further Information
Construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities. 0% Section 3
Conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building. 0% Section 6
Conversion (other than for housing associations) of a non-residential building into a qualifying dwelling or communal residential building and conversions of residential buildings to a different residential use. 5% Section 7
Renovation or alteration of empty residential premises. 5% Section 8
Approved alterations to listed dwellings and communal residential buildings, and certain listed buildings used by charities (rate shown with effect from 1 October 2012) 20% Section 9
Alterations to suit the condition of people with disabilities. 0% Notice 701/7 VAT reliefs for disabled people
Installation of energy saving materials; and grant funded heating system measures and qualifying security goods. 5% Notice 708/6 Energy-saving materials
Development of residential caravan parks. 0% Section 20
First time gas and electricity connections 0% Notice 701/19 Fuel and power
Installation of mobility aids for the elderly for use in domestic accommodation 5% Reduced-rate VAT on mobility aids for older people
Home improvements on domestic property situated in the Isle of Man 5% Isle of Man VAT Notice Home improvements available from:

Isle of Man Customs and Excise Advice Centre
Custom House
North Quay
Douglas
Isle of Man
IM99 1AG

(Telephone: 01624 648130)
(Website: IoM Treasury )

A combination of buildings may form a single dwelling, provided they are designed to function together for that purpose. For example, where you have two buildings, one building may comprise a lounge and kitchen, and the other comprises the bedrooms and bathroom. The buildings must be constructed or converted under a single project and single planning consent.

2.1.1 Which VAT rate do I charge?

You must charge the lowest rate applicable to your supply. For example, you may be carrying out an approved alteration to an empty listed dwelling. This work is zero-rated as an approved alteration of a listed dwelling rather than reduced-rated as an alteration of an empty dwelling.

You can only zero-rate or apply the reduced rate to your supply to the extent that it is within the relevant rules, with your charge being apportioned as appropriate on a fair and reasonable basis. In some cases, however, you can standard-rate the whole of your supply if you decide not to make an apportionment. This is explained in the relevant sections of this notice.



Comments

PaulM

14:47 PM, 21st January 2019
About A year ago

You also qualify for Reduced Rate VAT when you are bringing a property back into residential use when it has been empty and dilapidated for in excess of 2 years.

However a couple of points to be aware of:

1. You can't claim the VAT back if you are charged the wrong rate. It is your main contractors responsibility, so check his invoices before paying.
2. Depending on the size of your contractor, he may not be financially stable enough to do this as he will have to carry the additional 15% VAT liability until his next return. To clarify my point, he will have to pay the 20% vat on materials purchased, but can only charge you 5%. The reclaim of the additional 15% won't come until his next return.

I've found Contractors, Accountants, and Utility companies are unaware of this and some will challenge it, so have your records ready to challenge back!

My advice is to read the VAT Notice 708 well and read it again as it will save you money.

Robert Mellors

21:28 PM, 21st January 2019
About A year ago

Reply to the comment left by PaulM at 21/01/2019 - 14:47
Thanks PaulM, but may I also add that for bringing empty properties back into use, I believe that the landlord would need to be able to prove that the property has been vacant for over 2 years, so he would perhaps need evidence from the Council Tax dept or other source that could verify this. - Apart from Council Tax, any ideas as to how else a landlord could prove that a property has been vacant for over 2 years?

PaulM

22:26 PM, 21st January 2019
About A year ago

Hi Robert,
Exactly. The Council is the most reliable entity, but I have used Solicitors as well where it is an estate sale.
Unfortunately other utility companies won't provide any details whatsoever on previous occupiers.

The other thing I would advise is to speak to HM Customs & Excise if in doubt, as they don't bite and can be very helpful. In my experience, most contractors are too scared to do that so always err on the side of caution.

Michael Barnes

22:31 PM, 21st January 2019
About A year ago

Reply to the comment left by PaulM at 21/01/2019 - 14:47
Re point 2: so you need to make contractor aware of the VAT position before agreeing to use him.

PaulM

22:42 PM, 21st January 2019
About A year ago

Absolutely as it's the main contractor who's responsible for paying the Vat on materials at source but then only charging on at the Reduced Rate.

If you're doing the works yourself or supplying materials for someone else to install, then you can only benefit on the labour costs (assuming they're Vat registered). By definition, Property Investment is not a trade and therefore can't be VAT registered.

Ian Narbeth

11:21 AM, 28th January 2019
About A year ago

We have benefitted from reduced rate VAT on conversion of houses to HMOs. It was new to our contractor's accountant but he understood it straightaway. In cases where the cost of materials is more than a third higher than the labour cost, it is cheaper to use a VAT registered builder than a non-VAT registered one.

Ian Narbeth

13:00 PM, 28th January 2019
About A year ago

Reply to the comment left by Michael Barnes at 21/01/2019 - 22:31
Michael, in practice you are right but as a matter of law the contractor ought not charge the full VAT rate. However, I very much doubt HMRC will be penalising contractors who do not charge 5% but instead charge 20%.

krodgerson

9:26 AM, 3rd March 2019
About 11 months ago

I vacated an HMO for a month in order to have a gas supply and gas central heating installed so that my EPC reached a rentable level. Should I have been charged the 5% VAT on the work and materials?

Robert Mellors

21:56 PM, 3rd March 2019
About 11 months ago

Reply to the comment left by krodgerson at 03/03/2019 - 09:26
If it was energy efficiency installations, as it appears to be from your description, then in my opinion the answer is yes, it should all have been at 5% VAT, (including any materials provided by the installer). However, I am not an accountant so please bring this VAT Notice 708 to your accountant's attention and seek his opinion.

PaulM

22:30 PM, 3rd March 2019
About 11 months ago

I would agree that if it's as you described, then it should have been as it adheres to the 708 notice:
https://www.gov.uk/guidance/vat-on-energy-saving-materials-and-heating-equipment-notice-7086

However, I don't think it's necessarily a question for your accountant, but more so for your contractor. If they supplied both the labour and materials, then it should have been at the reduced rate.
But if you've already paid, then you're probably too late as I doubt the contractor will take on the additional paperwork to issue a new invoice, amend his vat records, refund you the 15%, and wait to recover the vat from his next return.

Unfortunately, you can't claim it back yourself.

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