If you’re in the building industry you’ll know how competitive it is. Reducing the VAT you charge might help you win more work. The good news is that HMRC allows you to apply a reduced rate in some cases. When can you take advantage of this tax break?

Reduced rate

Where you provide construction services relating to buildings, you may be able to charge the 5% reduced VAT rate for the work (including materials). This will be important for private customers or businesses which can’t reclaim some or all of the VAT. Therefore, knowing when you can and can’t apply the reduced rate might help win you a contract.

When does 5% VAT apply?

The reduced VAT rate applies to various types of work on residential accommodation including renovation of a property that’s been empty for at least two years. However, there are exceptions which allow you to charge the lower rate even where the property hasn’t been vacant for some or all of that time.

When is a property empty?

HMRC will ignore some types of occupation and use of a property when considering the two-year test:

  • illegal occupation by squatters
  • non-residential use, such as using the property for storage, commercial or otherwise
  • occupation by a guardian for the purpose of preventing the property being occupied by squatters or vandalised. HMRC says that a guardian is a person who occupies the property at the request of the owner who can be charged a reasonable rent but there must not be a formal tenancy. They must not be required to look after the property as a caretaker or housekeeper.

Tip. The property owner can move into the habitable parts of the property after you’ve commenced the renovation work without jeopardising the 5% rate.

Reduced rate for occupied property

Based on the conditions mentioned above, if a property is occupied as a home you might think there’s no chance of the 5% rate applying. The good news is that the rules allow one more bite at the cherry where the following conditions are met:

  • the property hadn’t been lived in during the two years prior to when the person(s) living in it acquired it
  • no renovation work was carried out in the two years before the occupier acquired the property. Minor works needed to keep it dry and secure can be ignored
  • your building services are supplied to the occupier within a year of them acquiring the property.

Tip. So far we’ve referred to an empty private home, but the reduced rate can also apply to a property that will be used for a qualifying residential use, such as a nursing home.

Don’t forget the evidence

HMRC requires a high level of evidence to show that a property meets the criteria to count as empty. This might be obtainable from the owner or third parties, e.g. the local council, or both.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.