Empty homes and HMO conversions: Save 75% on VAT
Property renovations are a significant cost driver for investors. Depending on whether your tradesmen are VAT registered you may have to stump up an additional 20% on top of your renovation costs to pay for VAT. As a residential property investor you will not ordinarily be able to reclaim VAT. There are certain circumstances however where you can benefit from paying VAT at a reduced rate of 5%, giving you a 75% saving on VAT and freeing up some of your cash for the next project.
Empty Property. If the property you are renovating has been empty for 2 years or more, then you can pay a reduced rate of VAT of 5% on goods and services supplied during the renovation. This may be good for a property that was sold as part of a probate sale or where the occupier is moved into care but the family need to sell to pay for the care. There are a number of conditions that must be satisfied in order to benefit from this reduced rate of VAT:
Type of Property. The property must be either a dwelling for a single family household or a multiple occupancy dwelling. It can also be used for a relevant residential purpose although this last one will not be relevant for most investors, but where it is a certificate may be required to support the claim.
Two Years. The property must not have been lived during the period of two years which ends when the works start (not when they finish).
Planning. Where it is required, planning consent and statutory building control approval must have been granted for the renovation works.
HMO Conversion. If the property you are renovating is converted from a single dwelling into a HMO then you can pay a reduced rate of VAT of 5% on goods and services supplied during the conversion. The required criteria is that before the conversion there were no multiple occupancy dwellings but after it contains only multiple occupancy dwelling. In plain english this means it was a single dwelling before and after the conversion it is a HMO.
Evidence. You will need to keep records in order to be able to prove that your renovation works were eligible for reduced rate VAT. For empty houses you will need to be able to prove to HMRC if requested that the property was empty for 2 years. You will also need to prove this to the contractor you are using for the works so that they know they are able to charge you reduced rate VAT. Council tax records could be used to support an application or confirmation from the local authorities which often have a department that deals with empty property. For HMO conversions you will be able to use planning permission and floor plans/drawing as evidence. As ever ensure you have a robust and digital record keeping system in case there is a HMRC investigation.
Practical Point. The contractor you utilise should be aware that there are conditions where reduced rates of VAT are applied however the onus will be on you to prove to them that this is the case. They will be taking a risk as they will be left with a VAT bill for the difference if the claim is incorrect. Also be aware that the contractor will be required to purchase materials paying 20% VAT and therefore may require you to pay more funds up front to ensure that they are not hit with cashflow issues. Any materials purchased by you rather than the contractor will not benefit from reduced rate VAT and therefore it is more practical for your contractor to supply the materials.
Conclusion. It is a common mistake for investors to overpay VAT unnecessarily on the renovation of empty houses and conversion of HMO’s. Ensure that you engage with your contractor early so that they charge you a reduced rate of VAT where applicable. Thill will help protect your cashflow, enabling you to move onto the next project quicker.
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