Thinking of building your dream home, or converting a barn into a cosy dwelling? Whether you’re constructing on bare land or converting a farm building, understanding the different VAT treatment is essential.
The construction of a new house is generally zero rated for VAT with no VAT being charged on the construction services, or qualifying building materials supplied by a contractor. This applies where there is no existing building and where an existing building is completely demolished; however, leaving a single wall would mean it does not qualify as zero-rated.
The reduced rate of 5% applies when converting a non-residential building, such as a barn into a dwelling, or converting a derelict property that not been lived in for two years or more before the work began. This reduced rate covers qualifying labour and materials supplied by a contractor. Any self-build materials will incur VAT at the standard rate.
Building a house for you to live in
If you are undergoing a self-build project, you will pay 20% VAT on materials purchased directly from suppliers. The DIY housebuilders scheme will enable you to reclaim VAT incurred on building materials and certain services. VAT on certain costs, such as professional fees
for architects, surveyors, and non-essential items such as carpets and appliances, cannot be recovered.
A DIY housebuilder claim must be submitted to HMRC no more than six months after the building work is completed.
Planning conditions
Planning conditions and covenants can significantly affect your VAT eligibility. If your planning permission links the property to business activities or prevents it from being sold, or used separately from other land or buildings, this can affect your ability to claim zero or reduced rate VAT, and block a DIY claim.
If the planning condition simply limits occupancy to a specific group, such as agriculture, this doesn’t prevent your claim. HMRC also accept that incidental business use does not affect eligibility under the DIY scheme.
Letting a new build
If the property is provided to a farm worker who must live on-site as part of their job, input VAT can be recovered in full, as the dwelling is considered part of the business. If the intention is to let to a third party, the situation changes. Residential rental income, other than furnished holiday letting is exempt from VAT, meaning any VAT incurred on the build cannot be reclaimed.
Depending on the circumstances, it may be possible to structure the build in such a way that zero or reduced rate can apply, specific advice should always be sought.
Final thoughts
VAT rules around building homes and converting buildings, especially on farm are complex and often misunderstood. Thinking ahead and taking specialist advice early will significantly improve the likelihood of navigating the VAT legislation correctly, and to your best advantage.
Our recommendation is that you should always take VAT advice before submitting a planning application.
Please get in touch with our team if you need further advice.
