VAT Recovery on Residential Refurbishment
VAT Question
A common question asked is whether VAT incurred on the costs of renovating/refurbishing a residential property – whether for sale or leasing out – is recoverable.
VAT Answer
In most cases, it will not be recoverable. This is on the basis that the letting of the property or the sale of the property will be an exempt supply for VAT, and input tax is not recoverable against exempt supplies.
There are two exceptions to this, however:
- Property is intended for use as a furnished holiday let or similar.
- Property is empty for more than 10 years prior to the works starting.
For the first, as the supply of holiday accommodation or similar is a taxable supply (at 20%), then the VAT incurred on making the property ready for this supply is recoverable. This does involve actually making the supplies and charging VAT, however, and any change of use after the VAT has been recovered (e.g., change to residential letting) may cause a clawback of VAT dependent on the specific circumstances.
On the second, this is considered for VAT purposes a non-residential to residential conversion, as residential property is considered non-residential if not used for residential purposes in the previous 10 years. The resulting converted property will then be considered new residential property and can benefit from the zero rate. This is only applicable, however, where there is a grant of a major interest, i.e. a freehold sale or leasehold of more than 21 years.
Whilst in most other cases the VAT will not be recoverable due to the exempt supplies that will be made, the works may qualify for the reduced rate of VAT for an empty property refurbishment. The reduced rate will apply where the property is a residential dwelling that has been empty for at least 2 years prior to any works being carried out to the property.
The reduced rate will then apply to any qualifying services – such as 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 – including any goods that are provided by the contractor that are building material. Other services (e.g. professional services) and goods or non-building material supplied by the contractor (e.g. white goods, appliances and furniture) will all be charged at the standard rate of VAT.
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