Make sure you are aware of the three main situations when 5% VAT applies to builder services:
The conversion of a non‑residential building into a dwelling or building to be used for a relevant residential purpose;
Work on a dwelling that has not been lived in for at least two years;
Projects that will result in a change in the number of dwellings.
Builders often charge 20% VAT on their services even when a lower 5% rate may apply, causing increased costs for property owners who cannot claim input tax. However, there are three main situations when the 5% VAT rate applies to builder services, and it's important for builders and property owners to be aware of them.
The first situation is when a non-residential building is converted into dwellings or a building used for a relevant residential purpose. This includes conversions of churches, factories, warehouses, and other buildings into residential units. Builders must be given a certificate by the property owner for work on relevant residential purposes.
The second situation is when there is a change in the number of dwellings. For example, converting a detached house into two semi-detached houses or vice versa. The 5% rate also applies to projects that reduce the number of residential units.
The third situation is when a residential property has been vacant for at least two years. Builders need proof of the empty period from third-party sources to qualify for the 5% VAT rate.
The savings with the 5% rate can be significant, as it also extends to materials provided by builders. Property owners can save 15% VAT by purchasing materials through their builders. Additionally, having a "design and build" project allows for a lower rate of VAT on professional fees as well.
There are some common misconceptions about VAT in the construction industry. VAT certificates are not needed for work carried out on dwellings, the reduced VAT rate applies to subcontractors, the reverse charge applies to construction services subject to 5% and 20% VAT, and the correct VAT rate must always be charged regardless of the builder's circumstances.
In summary, understanding the situations when the 5% VAT rate applies to builder services can lead to significant savings for property owners and avoiding issues with incorrect VAT charges.