Did you know that some UK building projects don’t attract the full 20% VAT rate? In fact, under specific conditions, a reduced 5% VAT rate can apply to residential conversions and long-term vacant property renovations.
For homeowners, developers, and landlords, understanding this tax relief can lead to substantial savings. This guide breaks down when the 5% VAT applies, who qualifies, and how to ensure you benefit from it.
What Is the 5% VAT on Building Work?
In the UK, the standard VAT rate applied to most goods and services, including construction work, is 20%. However, certain types of residential building projects qualify for a reduced rate of 5% VAT, offering considerable savings, especially for private individuals and businesses that cannot reclaim input VAT.
The reduced rate is designed to support the regeneration of underused or vacant buildings and to encourage development that increases the housing stock.
It’s particularly relevant for property developers, buy-to-let landlords, and homeowners investing in major renovations or conversions. For non-VAT-registered individuals or exempt businesses (such as some landlords), this reduced rate translates into real cost savings rather than just a cash flow advantage.
Understanding when and how this reduced rate applies is essential. Incorrect VAT treatment can result in financial penalties, missed savings, or disputes with HMRC. This guide aims to provide clarity for homeowners, developers, and builders alike.
When Does the 5% VAT Rate Apply to Building Work?
The 5% VAT rate does not apply to all types of building work. It is reserved for projects that meet specific criteria defined by HMRC. There are three primary situations where this reduced rate applies:
- Conversion of non-residential buildings into dwellings or buildings used for a relevant residential purpose
- Projects that result in a change in the number of dwellings
- Renovation or alteration of residential properties that have been unoccupied for two years or more
Each of these categories is governed by strict HMRC guidance, particularly within VAT Notice 708. Understanding the scope and limitations of these scenarios is key to applying the correct rate.
Which Building Projects Qualify for the 5% VAT Rate?
Qualifying building projects generally fall under structural conversions, alterations, or renovations that meet certain residential criteria. Here’s a breakdown of eligible scenarios:
Residential Conversions
One of the most common qualifying projects is converting a non-residential building, such as an office, barn, or shop, into one or more dwellings. This includes buildings converted for use as care homes, student accommodation, or similar residential purposes.
To qualify, the building must not have been used for residential purposes previously. In some cases, if the building was once residential but has since been used commercially for over ten years, it may also qualify for reduced or even zero-rated VAT upon sale after conversion.
Change in the Number of Dwellings
Another area where the 5% VAT applies is when there is a change in the number of dwellings within a property. This includes both increases and decreases in the number of units.
For instance, converting a large house into multiple flats, or merging two flats into a single residence, both count as qualifying changes. What matters is that the number of “dwellings,” as defined by HMRC, is altered. Each change is assessed based on the structure and use of the building pre- and post-conversion.
It’s important to understand that HMRC requires this assessment to be made on a floor-by-floor basis in multi-storey buildings. If a three-storey block of flats is modified so that:
- The ground floor changes from one flat to two,
- The first floor from one flat to two,
- And the top floor remains as one flat,
Only the floors with a change in dwelling count qualify for 5% VAT. The top floor work would still attract 20% VAT, and an apportionment of VAT is required across the project.
Renovations of Long-Term Empty Properties
If a residential property has been unoccupied for two years or more, renovation or alteration work may be eligible for the 5% VAT rate. The unoccupied period must be verifiable through third-party evidence. Acceptable documentation includes:
- Council Tax records
- Electoral roll information
- Housing department statements
Statements from the owner, solicitor, or accountant are not accepted as valid evidence. This was confirmed in the case Gurpreet Singh Bhachu v Revenue & Customs [2013], where the builder relied solely on the client’s statement and lost the appeal when audited by HMRC.
The two-year period must be counted up to the start of the construction work, not the completion date.
How Is the 5% VAT Applied to Builder Services and Materials?
The reduced VAT rate applies only to services supplied by VAT-registered builders. If the contractor provides both labour and materials, the entire supply, including materials, is subject to the 5% VAT, provided the project qualifies.
However, materials bought independently by the homeowner or developer from a builder’s merchant are always standard rated at 20%. This often leads to confusion, but the rule is straightforward: only materials supplied as part of a qualifying construction service by the contractor are eligible for the reduced rate.
This leads to a practical tip: where possible, materials should be sourced and supplied through the builder to benefit from the reduced rate, unless the property owner is VAT-registered and can reclaim input VAT.
Comparison of VAT Rates in Construction Projects
To help clarify the VAT treatment of different types of building work, refer to the table below:
| Type of Work | VAT Rate | Conditions |
| New build residential property | 0% | Must be a completely new dwelling built from the ground up |
| Conversion of non-residential to residential | 5% | Must result in a dwelling or qualifying residential use |
| Change in number of dwellings | 5% | E.g. house split into flats or flats merged into one home |
| Renovation of property unoccupied for 2+ years | 5% | Proof of vacancy required |
| General renovation or extension (no qualifying conditions) | 20% | Default rate |
| Professional services (architects, surveyors) | 20% | Unless part of design-and-build contract |
What About Design-and-Build Contracts?
Professional services such as architects, project managers, and surveyors typically charge 20% VAT. However, if the entire project is carried out under a design-and-build contract, the reduced 5% VAT rate can apply to the entire service, including these professional elements.
This method not only simplifies invoicing but also allows for broader VAT savings. It’s important that the professional services are contracted directly through the builder to qualify. Otherwise, when billed separately, these services are subject to the standard 20% VAT.
Real-World Example: Potential VAT Savings
Let’s consider a case where an investor is converting a commercial office into three flats. The project costs £65,000.
| Category | Standard VAT @ 20% | Reduced VAT @ 5% |
| Total Project Cost | £65,000 | £65,000 |
| VAT Payable | £13,000 | £3,250 |
| VAT Saving | – | £9,750 |
For a business or private individual unable to reclaim VAT, this results in a direct cost saving of nearly £10,000, making it crucial to ensure the correct rate is applied from the outset. Want to see how much you could save on your own project? Use our UK VAT Calculator to estimate your costs.
Compliance and Documentation: What Evidence Do You Need?
To apply the reduced VAT rate and stay compliant with HMRC regulations, builders and developers must retain appropriate documentation. This includes:
- Planning permission and building regulations approval
- Architectural plans indicating changes to the dwelling structure
- Council documents verifying long-term vacancy
- Contracts showing design-and-build arrangements
There is no legal requirement for a certificate to be issued for work on standard dwellings. However, if the project involves conversion to a “relevant residential purpose” (like a care home or student accommodation), then a certificate is required.
What Builders and Developers Must Understand About VAT Application?
Builders often default to 20% VAT out of caution or unfamiliarity with HMRC rules. However, the law requires that the correct rate be applied, regardless of the builder’s VAT scheme.
Since 2021, the domestic reverse charge also applies to certain construction services. When one VAT-registered contractor invoices another within the CIS (Construction Industry Scheme), VAT is not charged directly. Instead, the recipient accounts for VAT under the reverse charge rules, applicable to both 5% and 20% rated services.
All builders involved in qualifying work must apply the correct VAT rate, including subcontractors, and must not inflate VAT charges to protect their margins.
Conclusion
The 5% VAT rate on building work can offer substantial savings, particularly for private individuals and businesses that cannot reclaim input VAT. However, the reduced rate is only available in specific, well-defined scenarios and must be applied correctly to avoid penalties or missed savings.
Builders and developers must take the time to understand HMRC’s guidance, assess project eligibility, and keep thorough documentation. Property owners should also ensure that their builders are informed and applying the correct VAT rate, as errors cannot be corrected retrospectively by HMRC.
When properly applied, the 5% VAT rate is a powerful tool for making renovation and conversion projects more financially viable in the UK property market.
FAQs About the 5% VAT on Building Work
What projects are eligible for the 5% VAT rate?
Qualifying projects include conversions from non-residential to residential use, changes in the number of dwellings, and renovations of properties empty for at least two years.
Can I get a refund if 20% VAT was charged on a qualifying project?
No, you cannot claim the difference from HMRC. The reduced VAT must be charged correctly by the builder at the outset.
What proof is required for empty property renovations?
Evidence from third parties such as council tax records, electoral roll data, or housing department confirmation is required.
Do all professional services attract 20% VAT?
Yes, unless provided as part of a design-and-build contract where the full project qualifies for 5% VAT.
Are certificates required for all 5% VAT projects?
No, certificates are only needed for buildings used for charitable or relevant residential purposes. Standard dwellings do not require certificates.
What is the reverse charge, and when does it apply?
The reverse charge applies when builders invoice other VAT and CIS-registered builders. It shifts the responsibility of VAT accounting to the recipient.
Can materials be purchased separately and still qualify for 5% VAT?
No, materials must be supplied and installed by the builder to benefit from the reduced rate. Standalone purchases are always standard-rated.
