Buildings and construction (VAT Notice 708)

Buildings and construction (VAT Notice 708)

1. Overview

This notice explains:

You should read this notice if you:

This notice may also help if you, as the customer or client of a contractor, subcontractor or developer, wish to satisfy yourself about the correct liability of the supplies of goods and services being made by them to you.

This is especially so in the case of DIY house builders and converters (‘self builders’), who contract VAT-registered builders or tradesmen to carry out construction or conversion services and are charged VAT on those services. Some, if not most, of the VAT charged can be recovered by the self builder through the provisions of the DIY house builders and converters VAT Refund Scheme but only where that VAT that has been correctly charged in the first place.

The Value Added Tax Act 1994, Section 30 holds that goods and services specified in Schedule 8 to the Act are zero-rated.

Schedule 8, Group 5 (as amended by SI 1995/280, SI 1997/50, SI 2001/2305, SI 2002/1101 and SI 2010/486) specifies when the construction (and the supply of building materials with those services), conversion of a non-residential building (and the supply of building materials with those services), sale, or long lease of a building is zero-rated.

Schedule 8, Group 6 (as amended by SI 1995/283, SI 1995/1625 (NI 9) and the Planning (Consequential Provisions) (Scotland) Act 1997) specifies when the alteration (and the supply of building materials with those services), sale, or long lease of a protected building is zero-rated.

The Value Added Tax Act 1994, Section 29A (as inserted by the Finance Act 2001, section 99(4)) holds that goods and services specified in Schedule 7A to the Act are reduced-rated.

Schedule 7A, Group 6 (as inserted by Finance Act 2001, section 99(5) and amended by SI 2002/1100) specifies when a residential conversion is reduced-rated.

Schedule 7A, Group 7 (as inserted by Finance Act 2001, section 99(5) and amended by SI 2002/1100 and SI 2007/3448) specifies when the renovation and alteration of a dwelling is reduced-rated.

Schedule 10, Part 2 (as amended by SI 2002/1102 and SI 2011/86) specifies when a taxable self-supply arises should the qualifying use of a certificated building cease or decrease or the building be disposed of.

The rules that ‘block’ developers from deducting input tax on goods that are not building materials are found in the VAT (Input Tax) Order 1992 (SI 1992/3222), articles 2 and 6 (as amended by SI 1995/281).

The special time of supply rules for builders are found in the Value Added Tax Regulations 1995 (SI 1995/2518), Regulations 89 and 93 (as amended by SI 1997/2887 and SI 1999/1374).

The rules for the self-supply of construction services are found in the Value Added Tax (Self-Supply of Construction Services) Order 1989 (SI 1989/472).

Paragraphs 18.1 and 18.2 have the force of law. The text of these paragraphs is indicated by a statement.

2. VAT liability

The construction of a new building and work to an existing building is normally standard-rated. There are various exceptions to this.

Construction serviceRate of VATFurther information
Construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities0%section 3
Conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building0%section 6
Conversion (other than for housing associations) of a non-residential building into a qualifying dwelling or communal residential building and conversions of residential buildings to a different residential use5%section 7
Renovation or alteration of empty residential premises5%section 8
Approved alterations to listed dwellings and communal residential buildings, and certain listed buildings used by charities (rate shown with effect from 1 October 2012)20%section 9
Alterations to suit the condition of people with disabilities0%Reliefs from VAT for disabled and older people (VAT Notice 701/7)
Installation of energy saving materials; and grant funded heating system measures and qualifying security goods5%Energy-saving materials and heating equipment (VAT Notice 708/6)
Development of residential caravan parks0%section 20
First time gas and electricity connections0%Fuel and power (VAT Notice 701/19)
Installation of mobility aids for the elderly for use in domestic accommodation5%Reduced rate VAT on mobility aids for older people
Home improvements on domestic property situated in the Isle of Man5%Isle of Man VAT Notice Home improvements available from:Isle of Man Customs and Excise Advice CentreCustom HouseNorth QuayDouglasIsle of ManIM99 1AG(Telephone: 01624 648130)(Website: IoM Treasury)

A combination of buildings may form a single dwelling, as long as they’re designed to function together for that purpose. For example, where you have 2 buildings, one building may comprise a lounge and kitchen, and the other comprises the bedrooms and bathroom. The buildings must be constructed or converted under a single project and single planning consent.

You apply the same VAT rate to retention payments as that applied to previous payments made under the contract. Further information on retention payments can be found in paragraph 23.1.2.

Subcontractors are contractors who work to other contractors. For the most part they can zero rate or reduce rate their supplies according to the building being constructed or worked on, as noted at paragraph 2.1.

But the exceptions are:

Retailers and builders merchants charge VAT at the standard rate on most items they sell.

Builders charge VAT on ‘building materials’ that they supply and incorporate in a building (or its site) at the same rate as for their work. Therefore, if their work is zero-rated or reduced-rated, then so are the ‘building materials’. But some items are not ‘building materials’ and remain standard-rated.

Further information on this can be found in sections 11 and 13.

The sale or lease of a building is zero-rated, standard-rated, exempt from VAT or outside the scope of VAT, depending on the circumstances.

This notice explains when the sale or lease of a building is zero-rated.

The first sale of, or long lease in a:

An explanation of when the sale or lease of a building is standard-rated or exempt from VAT can be found in Land and property (VAT Notice 742).

With the exception of certain specified costs (business entertainment, incorporated non-building materials, cars), you’re entitled to deduct input tax incurred on costs that you use or intend to use in making taxable supplies (including zero-rated supplies).

You cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. Further information is in Partial exemption (VAT Notice 706).

3. Zero rating the construction of new buildings

If you construct a new building you will normally have to charge VAT at the standard rate. You may be able to zero rate your supply if you’re involved in constructing a qualifying building. A qualifying building can be a building:

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your services.

If you supply and install goods with your services, you will also need to read section 11 and 12 to determine the liability of those goods.

Your services can be zero-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 3.5.

The following table will help you decide if a qualifying building is being constructed.

A qualifying building is constructed whenand it is
it’s built from scratch, and, before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained) - see paragraph 3.2.3the new building makes use of no more than a single facade (or a double facade on a corner site) of a pre-existing building, the pre-existing building is demolished completely (other than the retained facade) before work on the new building is started and the facade is retained as a condition or requirement of statutory planning consent or similar permission - see paragraph 3.2.3a new building is constructed against an existing building so that they share a wall but there is no internal access between themeither ‘designed as a dwelling or number of dwellings’ - see paragraph 14.2,orintended for use solely for a ‘relevant residential purpose’ - see paragraph 14.6,orintended for use solely for a ‘relevant charitable purpose’ - see paragraph 14.7
an existing building is enlarged or extended and the enlargement or extension creates an additional dwelling or dwellings - see paragraph 3.2‘designed as a dwelling or number of dwellings’ - see paragraph 14.2
an annexe to an existing building is built - see paragraphs 3.2.5 to 3.2.9;intended the annexe, or a part of it, be used solely for a ‘relevant charitable purpose’ - see paragraph 14.7
a garage is built, or a building is converted into a garageconstructed or converted at the same time as, and intended to be occupied with, a building ‘designed as a dwelling or number of dwellings’ - see paragraph 14.2
a building is built that is one of a number of buildings constructed at the same time on the same site - see paragraph 3.2.2intended to be used together with those other buildings as a unit solely for a ‘relevant residential purpose’ - see paragraph 14.6

Common examples of work you cannot zero rate include the construction of a:

In determining whether a building has been demolished completely to ground level, you can ignore the retention of party walls that separate one building from another building that is not being demolished.

So, for example, you’re ‘constructing a building’ when you ‘infill’ in a row of terraced houses provided the pre-existing house is demolished completely to ground level apart from the party walls shared with the adjoining houses either side.

But if you’re re-developing adjoining houses in a terrace, the party wall between the houses being redeveloped will also need to be demolished before you’re seen to be ‘constructing a building’ for VAT purposes.

A party wall need not separate a building from another building, a party wall can also be the wall of a building on one property and a boundary or garden wall for the adjoining property. If such a wall is retained, the building in question cannot be said to have been demolished completely to ground level.

In order for zero rating to apply, a facade (or 2 facades in the case of a corner site) must be retained as a condition or requirement of a statutory planning consent or similar permission.

Planners may include this requirement as a condition within their planning consent letter. HMRC will also accept evidence that the planning authorities have seen an application with plans showing that a facade is to be retained and that approval has been granted for construction to proceed on that basis.

Once planning approval has been granted the construction must proceed in accordance with the submitted plans and from that point they become the ‘condition or requirement’.

You can zero rate the enlargement of, or extension to, an existing building to the extent that the extension or enlargement contains an additional dwelling provided both the following conditions are met, the:

So, for example, a new eligible flat built on top of an existing building can be zero-rated.

If the new dwelling is partly or wholly contained within the existing building, you cannot zero rate your work under the rules in this section. You may be able to reduce rate your charge as a ‘changed number of dwellings conversion’ - the rules are explained in section 7. Also, the sale or long lease of the new dwelling could be zero-rated as a converted non-residential building - the rules are explained in section 5.

The construction of a building intended for use solely for a relevant charitable purpose is zero-rated, with additions to an existing building normally being standard-rated. But the addition (or where only part of the addition is being used solely for a relevant charitable purpose, that part) can be zero-rated when all the following conditions are met:

The demolition and reconstruction of an annexe to an existing building can be zero-rated subject to the conditions being met.

The demolition and reconstruction of part of an existing building, such as the wing of a building, or the conversion of an existing building (or part) to an annexe cannot be zero-rated as the construction of an annexe.

An annexe can be either a structure attached to an existing building or a structure detached from it. A detached structure is treated for VAT purposes as a separate building. The comments in this section only apply to attached structures.

There is no legal definition of ‘annexe’. In order to be considered an annexe, a structure must be attached to an existing building but not in such a way so as to be considered an enlargement or extension of that building.

An enlargement or extension would involve making the building bigger so as to provide extra space for the activities already carried out in the existing building. Examples of an enlargement or extension are a classroom or a sports hall added to an existing school building or an additional function room (or kitchen or toilet block) added to an existing village hall.

On the other hand, an annexe would provide extra space for activities distinct from but associated with the activities carried out in the existing building. The annexe and the existing building would form 2 separate parts of a single building that operate independently of each other.

Examples of an annexe are a day hospice added to an existing residential hospice, a self-contained suite of rooms added to an existing village hall, a church hall added to an existing church or a nursery added to a school building.

When determining the second condition at paragraph 3.2.5, the annexe need not be an annexe to a building used solely for a relevant charitable purpose. What’s important is that the annexe itself is intended for use solely for a relevant charitable purpose. For an explanation of what relevant charitable purpose means see paragraph 14.7.

Where only a part of the annexe is intended for use solely for a relevant charitable purpose, you can only zero rate your supply to the extent that it relates to that part. The apportionment rules in section 16 apply in the same way to the construction of relevant charitable annexes as they do to the construction of buildings.

For zero rating to apply the whole annexe must be capable of functioning independently from the existing building, even if only part of it is intended to be used solely for a relevant charitable purpose.

An annexe is capable of functioning independently when the activities in the annexe can be carried on without reliance on the existing building. You can ignore the existence of building services (electricity and water supplies) that are shared with the existing building.

The fourth condition at paragraph 3.2.5 is that the annexe and the existing building must each have its own independent main access. So, even if the annexe has its own entrance the:

Your services are supplied ‘in the course of the construction’ when you carry out:

Completion takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

Once construction is ‘complete’, any further supplies of construction services (other than those mentioned at paragraph 3.3.6) are no longer ‘in the course of construction’ and are thus ineligible for the zero rate.

A developer is in the process of constructing a house for sale. The house buyer would like the house to include an attached conservatory and so contracts with a conservatory specialist to supply and install the conservatory prior to them moving in. The developer refuses the conservatory supplier access to the site until after they have finished their work and the house has been conveyed to the house buyer. In such circumstances, the supply by the conservatory supplier is not work ‘in the course of the construction’ of the house but work to an existing building and cannot be zero-rated.

A developer constructs and sells ‘shell’ loft apartments for fitting out by the homebuyer. When the developer sells the lofts, their construction would not be ‘complete’. Future work to fit them out can be zero-rated until such time as they’re habitable.

A non-fee paying school obtains planning permission to construct a building that will be used solely for a relevant charitable purpose. But due to limited funds, the extent of the work is scaled down and a smaller building is constructed instead. Funds are later obtained to extend and enlarge the building to produce a building of the same capacity as originally planned

In such circumstances, the building would be ‘complete’ at the end of the first set of works and the later works are standard-rated.

You may also need to bear in mind, the length of the interval between construction phases, the reason for the interval and the nature of the construction works in the second phase.

Snagging (or the correction of faults) is often carried out after the building has been ‘completed’. The work forms part of a zero-rated building contract, provided you carried out the initial building work and the snagging forms part of that building contract.

If you’re carrying out the work as a separate supply (you may, for example, be contracted to correct faults where the original work was carried out by another person) and it is performed after the building has been completed, then the work is to an existing building and cannot be zero-rated under the rules in this section.

Subject to paragraph 3.3.6, your work is closely connected to the construction of the building when it either:

(a) allows the construction of the building to take place, such as when you:

(b) produces works that allow the building to be used, such as works in connection with the:

The planting of shrubs, trees and flowers would not normally be seen as being ‘closely connected…’ except to the extent that it’s detailed on a landscaping scheme approved by a planning authority under the terms of a planning consent condition. This does not include the replacement of trees and shrubs that die, or become damaged or diseased.

It’s not possible to produce an exhaustive list of services that are closely connected to the construction of the building, and each case not included in (a) and (b) must be looked at on its own merits.

You need not be the main contractor in order for your supplies to be considered to be ‘works closely connected…’. You can be a subcontractor or another contractor.

Examples of work that are unconnected to the construction of a building include:

Further information on planning gain agreements can be found in Land and property (VAT Notice 742).

If you carry out services either before or after the physical construction of the building takes place, they can only be seen as closely connected if there’s a close connection between when they’re performed and when the physical construction of the building takes place.

Services described in paragraph 3.3.4 may be zero-rated (subject to the conditions in paragraph 3.1.2) where, for example:

Services in paragraph 3.3.4 are standard-rated where, for example:

The connection of utilities to an existing building is normally standard-rated. But in some cases, the first time connection of gas or electricity may be reduce-rated.

Further information can be found in Fuel and power (VAT Notice 701/19).

The supply of architectural, surveying, consultancy and supervisory services is always standard-rated. These services are procured in a number of ways.

The building client engages a contractor to carry out both the design and construction elements of the project. Where it’s clear in the contract that any services of architects, surveyors or others acting as a consultant or in a supervisory capacity are no more than cost components of the contractors supply and are not specifically supplied on to the customer, then the whole supply can be treated as being eligible for the zero rate.

The building client engages an external consultant to plan, manage and co-ordinate the whole project including establishing competitive bids for all elements of the work, with the successful contractors being employed directly by the building client. Management fees paid by the building client to the consultants are standard-rated.

This system can take various forms. Normally the building client first appoints a professional design team and engages a management contractor to advise them. If the project goes ahead, the management contractor will act as the main contractor for the work (engaging ‘works contractors’ to carry out work to them as necessary). Their preliminary advisory services are then treated in the same way as their main construction services. If the project does not go ahead, their preliminary advisory services are standard-rated.

Goods hired on their own are always standard-rated. Examples include the hire of:

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services - see VAT guide (VAT Notice 700) for more information. Such supplies are not zero-rated under the rules in this section.

If you construct a building that is only in part a zero-rated building (see paragraph 3.2), you can only zero rate your work to the qualifying parts. For example, if you construct a building containing a shop with a flat above, then only the construction of the flat can be zero-rated. This is explained further at section 16.

Where a service is supplied in part in relation to the construction of a zero-rated building and in part for other purposes, a fair and reasonable apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

A road is built through a development site where both zero-rated and standard-rated buildings are being constructed. The road serves all the buildings and so the work is carried out, in part, in relation to the construction of the zero-rated buildings and, in part, in relation to the construction of the standard-rated buildings. The liability of installing the road may be apportioned on a fair and reasonable basis, to reflect the buildings being served.

If you decide not to make an apportionment then none of your work can be zero-rated.

4. Zero rating the sale of, or long lease in, new buildings

The sale of, or lease in, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT depending on the circumstances. If you have constructed a ‘qualifying’ building, that is a building:

You may be able to zero rate your first sale of, or long lease in, the property. The remainder of this section explains the detailed conditions that need to be met before you can zero rate your supply.

For an explanation of when a developer cannot recover input tax on goods incorporated in a zero-rated building see section 12.

If you cannot zero rate your supply you should read Land and property (VAT Notice 742) to determine if your supply is standard-rated or exempt. Remember, you cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable (including zero-rated) and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. Further information can be found in Partial exemption (VAT Notice 706).

Your supply can be zero-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 4.8.

You’re granting a major interest in a building when you sell, assign or surrender:

If you intend to make a zero-rated grant of a major interest in a building (thereby recovering input tax on costs related to the construction and intended sale) but make a short lease in it (say due to a downturn in the property market) before making the zero-rated supply, you may need to make an adjustment to any input tax you have claimed.

The amount of adjustment will depend on your future intentions.

Further information on input tax and partial exemption can be found in Partial exemption (VAT Notice 706).

Where a grant of a major interest is either a long lease or a tenancy agreement, zero rating is restricted to the premium or the first rental payment made in respect of that grant. Subsequent payments are exempt.

The effect of this is that a developer is able to treat as input tax attributable to a taxable supply, the VAT incurred on construction and selling costs. The VAT incurred on ongoing maintenance costs is attributable to the exempt supplies.

Further information on input tax and partial exemption can be found in Partial exemption (VAT Notice 706).

Shared ownership arrangements involve the sharing of equity in a dwelling between, typically, an occupier and a housing association. The occupier purchases a dwelling at a proportion of its value and then pays rent to cover the share in the retained equity. Occupiers have the option of increasing their share of the equity by making additional payments, acquiring a further share related to the current value of the property (‘staircasing’). The rent is then reduced accordingly.

The initial payment by the occupier for their share of the equity can be zero-rated.

The subsequent rental payments and any additional ‘staircase’ payments are not zero-rated but exempt.

The effect of this is that a developer is able to treat as input tax attributable to a taxable supply, the VAT incurred on construction and selling costs. The VAT incurred on ongoing maintenance costs is attributable to the exempt supplies. Any VAT incurred on the costs of staircasing agreements is also attributable to exempt supplies.

Further information on input tax and partial exemption can be found in Partial exemption (VAT Notice 706).

For the purposes of the zero rate for grants of major interests, a ‘holiday home’ is a ‘building designed as a dwelling or number of dwellings’ where the person buying or leasing the property is:

The sale or long lease of a ‘holiday home’ cannot be zero-rated.

If the building is less than 3 years old when the sale or long lease takes place, the supply is standard-rated.

If the building is 3 years old or more, the supply is exempt but where a long lease is involved, the lease is only exempt to the extent that the consideration is in the form of a premium. Any subsequent payments for a lease, such as ground rents and service charges, are standard-rated.

Further information can be found in Hotels and holiday accommodation (VAT Notice 709/3).

Building work in the course of the construction of a ‘holiday home’ that is ‘designed as a dwelling’ is zero-rated when the conditions at paragraph 3.1.2 are met.

You’re a ‘person constructing’ a building if, in relation to that building, you’re acting as, or you have, at any point in the past, acted as a:

Multiple people can have ‘person construction’ status, but ‘person constructing’ status is not transferred when you transfer property. Instead each person must meet the conditions at paragraph 4.5.1.

An example is where a developer takes over and finishes a partly completed building. Both the first and second developers have ‘person constructing’ status because they have both been involved in physically constructing the building.

For an explanation of when the sale of a partly constructed building is zero-rated, see paragraph 4.7.4.

You can inherit ‘person constructing status’ when you acquire a new, completed residential or charitable development as part of a transfer of a going concern (TOGC) (see paragraph 4.5.6).

For VAT purposes, any business carried on by a member of a VAT group is treated as carried on by the representative member. But when determining whether a supply can be zero-rated, ‘person constructing’ status is only considered from the perspective of the group member who, in reality, makes the supply. This need not be the representative member.

For example a VAT group includes a:

Sometimes the beneficial owner of a property must register for VAT instead of the legal owner - further information can be found in Land and property (VAT Notice 742). In such circumstances the beneficial owner must have ‘person constructing’ status before the sale or long lease of the property can be zero-rated.

A person acquiring a completed residential or charitable development as part of aTOGCinherits ‘person constructing’ status and is capable of making a zero-rated first major interest grant in that building or part of it as long as:

a) a zero-rated grant has not already been made of the completed building or relevant part by a previous owner (not including the grant that gives rise to theTOGC)

b) the person acquiring the building as aTOGCwould suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business - this entails the transfer (as aTOGC) of its entire property portfolio of newly constructed residential or charitable buildings to an associated company, which will make first major interest grants - if these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the capital goods scheme or partial exemption ‘clawback’ provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances - we would consider this to be an unfair disadvantage)

c) that person would not obtain an unfair VAT advantage by being in a position to make zero-rated supplies (for example, by recovering input tax on a refurbishment of an existing building)

Subject to the conditions at paragraph 4.1.2, you can only zero rate your first sale of, or long lease (see paragraph 4.2) in, a building (or part of a building). Zero rating is not affected by:

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT - for further information see Land and property (VAT Notice 742).

The grant of a major interest between 2 members of the same VAT group is ignored for VAT purposes. It’s the first grant of a major interest to a person outside of the group that is the first grant for the purposes of zero rating.

The member of the group actually making that grant must have ‘person constructing’ status (see paragraph 4.5.4). Under VAT grouping rules all supplies are considered to be made by the representative member, but this will not prevent zero rating from applying if the member that would make the supply but for this rule has ‘person constructing’ status.

If you’re making a zero-rated sale of, or long lease in, a building or dwelling you can normally zero rate with the sale or long lease:

Further information on grants of parking facilities with dwellings can be found in Land and property (VAT Notice 742).

The sale of bare building land is not zero-rated and would be exempt from VAT, unless an option to tax has been taken out.

If the land contains civil engineering works (roads, water and electricity supplies) but no building is yet under construction, the sale would also be exempt from VAT unless an option to tax has been taken out.

Further information on the option to tax can be found in Opting to tax land and buildings (VAT Notice 742A).

If you sell land to someone and, at the same time, enter into a separate construction contract with them to build on what will be their land, you’re making 2 supplies and the VAT liability of each supply should be considered independently. The VAT liability of constructing new buildings is explained in section 3.

You can also zero rate along with the zero-rated sale or long lease of a building designed as a dwelling or number of dwellings, a new garage or a garage resulting from the conversion of a non-residential building provided that the garage:

Subject to the conditions at paragraph 4.1.2, you can zero rate the sale of, or long lease in, land that will form the site of a building provided a building is clearly under construction.

If you sell or long lease a plot where a building is clearly not under construction, your supply is not zero-rated and you should follow the guidance at paragraph 4.7.2.

If you sell or long lease a building (or part of a building) that’s only in part a zero-rated building, then you must apportion your supply. This is explained further at section 16.

If you sell or long lease qualifying buildings along with non-qualifying buildings or land that does not form part of the site of the qualifying buildings (see paragraph 4.6.1), you must apportion your supply between them on a fair and reasonable basis.

You own building land and commence constructing qualifying houses on identifiable plots. You then sell the whole site. The sale of the houses and their plots will be zero-rated but not the remaining building land or the infrastructure (roads, footpaths) leading to the house plots. The sale in that part of the development will be exempt, subject to any option to tax being taken out.

If you’re selling to another developer who will continue with the development, the sale may be outside the scope of VAT as theTOGC. Further information can be found in Transfer a business as a going concern (VAT Notice 700/9).

You own building land and develop a number of commercial buildings on it. You sell the freehold of the developed site to a charity but they can only certify that one of the buildings will be used solely for a relevant charitable purpose. Only the part of the sale attributable to that building and its site, can be zero-rated. The part of the sale attributable to the other buildings will be standard-rated if the buildings are less than 3 years old or exempt if the buildings are older, subject to any option to tax.

Further information on the treatment of buildings that do not qualify for the zero rate and the option to tax can be found in Land and property (VAT Notice 742) and Opting to tax land and buildings (VAT Notice 742A).

5. Zero rating the sale of, or long lease in, non-residential buildings converted to residential use

The sale of, or lease in, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT depending on the circumstances. If you convert a non-residential building into a:

You may be able to zero rate your first sale of, or long lease in, the converted property. Non-residential buildings include residential buildings that have not been lived in for at least 10 years.

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your supply.

For an explanation of when a developer cannot recover input tax on goods incorporated in a zero-rated building see section 12.

If you cannot zero rate your supply you should read Land and property (VAT Notice 742) to determine if your supply is standard-rated or exempt. You cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable (including zero-rated) and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. Further information can be found in Partial exemption (VAT Notice 706).

Your supply can be zero-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 5.8.

You’re granting a major interest in a building when you sell, assign or surrender:

A ‘non-residential conversion’ takes place in 2 situations. The first is when the building (or part) being converted has never been used as a dwelling or number of dwellings (see paragraph 5.3.1) for a ‘relevant residential purpose’ (see paragraph 14.6), and it is converted into a building ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose (see paragraph 14.6).

The second situation requires that in the 10 years immediately before (see paragraph 5.3.2) the sale or long lease, the building (or part) has not been used as a dwelling or number of dwellings or for a ‘relevant residential purpose’ and it is converted into a building either ‘designed as a dwelling or number of dwellings’ (see paragraph 14.2), or intended for use solely for a ‘relevant residential purpose’ (see paragraph 14.6).

Examples of a ‘non-residential conversion’ into a building ‘designed as a dwelling or number of dwellings’ include the conversion of:

The conversion of a garage, occupied together with a dwelling, into a building designed as a dwelling is not a non-residential conversion.

The term ‘garage’ not only covers buildings designed to store motor vehicles but also buildings such as barns, to the extent that they’re used as garages.

But if it can be established that the garage was never used to store motor vehicles or has not been used as a garage for a considerable length of time prior to conversion, its conversion into a building designed as a dwelling can be a non-residential conversion.

A building is ‘used as a dwelling’ when it has been designed or adapted for use as someone’s home and is so used. The living accommodation need not have been self-contained or to modern standards. So, buildings that have been ‘used as a dwelling’, include:

If you convert these types of property into a building ‘designed as a dwelling or number of dwellings’, or intended for use solely for a ‘relevant residential purpose’, then, unless the 10-year rule applies, your sale of, or long lease in, the property cannot be zero-rated and is exempt from VAT.

You cannot normally zero rate the sale of, or long lease in, a building that has previously been lived in. Subject to the conditions at paragraph 5.1.2, the exception to this is where, in the 10 years immediately before you make your sale or long lease, it has not been lived in and following the work it is ‘designed as a dwelling’ or intended for use solely for a ‘relevant residential purpose’.

If you start work to convert the property into an eligible dwelling or residential building before the ten year point is reached, you can recover associated VAT costs as input tax provided that you intend to sell or make a long lease in it on or after the 10 year point has been reached. If you change your intention, you may have to repay any input tax that has been claimed. Further information can be found in Partial exemption (VAT Notice 706).

You may be required to show that the building has not been lived in during the 10 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.

If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 10 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in he should write with their best estimate. We may then call for other supporting evidence.

When considering when a dwelling was last lived in, you can ignore any:

A ‘guardian’ is a person who is installed in a property by the owner or on behalf of the owner in order to deter squatters and vandals. They may pay a low rent on terms that fall short of a formal tenancy. Alternatively, they may be paid to occupy the property.

A ‘guardian’ is to be distinguished from a caretaker or housekeeper who lives permanently in the property. Property occupied by a caretaker or housekeeper is likely to be furnished throughout.

If the dwelling has been lived in on an occasional basis (for example, because it was a second home) in the 10 years immediately before you sell or long lease the property, you cannot zero rate your supply.

To qualify for zero rating the conversion must only use non-residential parts of the building.

For example, you convert a 2-storey public house containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ - see paragraph 5.3.1) into 2 flats, 1 being created out of the bar areas and 1 being created out of the private living area. The onward sale or long lease of the former is zero-rated but that of the latter will be exempt.

The onward sale or long lease of the house or houses cannot be zero-rated and is exempt when the conversion uses a mixture of non-residential parts of the building and other parts. This would include where you convert the same property into either:

For the purposes of the zero rate on grants of major interests, a ‘holiday home’ is a ‘building designed as a dwelling or number of dwellings’ where the person buying or leasing the property is:

The sale or long lease of a ‘holiday home’ cannot be zero-rated.

If, after conversion, the building is less than 3 years old when the sale or long lease is made, the sale or long lease is standard-rated. If the building is 3 years old or more, the sale or long lease is exempt. The long lease is exempt to the extent that the consideration is in the form of a premium.

Any subsequent payments for a lease, such as ground rents and service charges, are standard-rated.

Further information can be found in Hotels and holiday accommodation (VAT Notice 709/3).

You’re a ‘person converting’ a building if, in relation to that building, you’re acting as, or have, at any point in the past, acted as a:

More than one person can have ‘person converting’ status, but this status is not transferred when you transfer property. Instead each person must meet the conditions at paragraph 5.5.1.

An example is where a developer takes over and finishes a partly converted building. The first and second developers both have ‘person converting’ status because they have both been involved in physically converting the building.

For an explanation of when the sale of a partly converted building is zero-rated see paragraph 5.7.3.

The ‘person converting’ status can only be transferred when you have inherited this when you acquired a converted residential development as part of aTOGC(see paragraph 5.5.6).

For VAT purposes, any business carried on by a member of a VAT group is treated as carried on by the representative member, but when determining whether a supply can be zero-rated, ‘person converting’ status is only considered from the perspective of the group member who, in reality, makes the supply. This need not be the representative member.

For example a VAT group includes a:

Sometimes the beneficial owner of a property must register for VAT instead of the legal owner, further information can be found in Land and property (VAT Notice 742). In such circumstances the beneficial owner must have ‘person converting’ status before the sale or long lease of the property can be zero-rated.

A person acquiring a residential development that has been subject to a qualifying conversion as part of aTOGCinherits ‘person converting’ status and is capable of making a zero-rated first major interest grant in that building or part of it as long as:

a) a zero-rated grant has not already been made of the converted building or relevant part by a previous owner (not including the grant that gives rise to theTOGC)

b) the person acquiring the building as aTOGCwould suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business - this entails the transfer (as aTOGC) of its entire property portfolio of newly constructed or converted qualifying buildings to an associated company, which will make first major interest grants - if these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the capital goods scheme or partial exemption ‘claw back’ provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances - we would consider this to be an unfair disadvantage)

c) that person would not obtain an unfair VAT advantage by being in a position to make zero-rated supplies (for example, by recovering input tax on a refurbishment of an existing building)

Subject to the conditions at paragraph 5.1.2, you can only zero rate your first sale of, or long lease (see paragraph 4.2) in, a building (or part of a building). Zero rating is not affected by:

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT - for further information see Land and property (VAT Notice 742).

The grant of a major interest between 2 members of the same VAT group is ignored for VAT purposes. It’s the first grant of a major interest to a person outside of the group that is the first grant for the purposes of zero rating.

The member of the group actually making that grant must have ‘person converting’ status (see paragraph 5.5.4). Under VAT grouping rules all supplies are considered to be made by the representative member, but this will not prevent zero rating from applying if the member that would make the supply but for this rule has ‘person constructing’ status.

If you’re making a zero-rated sale of, or long lease in, a building or dwelling you can normally zero rate with the sale or long lease:

Further information on grants of parking facilities with dwellings can be found in Land and property (VAT Notice 742).

You can also zero rate along with the zero-rated sale or long lease of a building designed as a dwelling or number of dwellings, a new garage or a garage resulting from the conversion of a non-residential building provided that the garage:

Subject to the conditions at paragraph 5.1.2, you can zero rate the sale of, or long lease in, a building where a real and meaningful start on the conversion has been made. This means that the work must have been more than securing or maintaining the existing structure.

You can only zero rate the sale of, or long lease in, a building (or part of a building) when the new qualifying residential accommodation is created wholly from a non-residential building or part of a building. If you carry out a mixture of qualifying and non-qualifying conversions in a building you can zero rate the sale of, or long lease in, the qualifying parts and apportion your charge. For example you convert a:

If you sell or long lease a development site containing a mixture of buildings that qualify for zero rating as the conversion of a non-residential building (or part of a building) and other buildings, you must apportion the liability of your supply between them on a fair and reasonable basis.

6. Zero rating the conversion of non-residential buildings for relevant housing associations

If you carry out work to an existing building you will normally have to charge VAT at the standard rate or the reduced rate. You may be able to zero rate your supply if you provide conversion services to a relevant housing association and during the course of your work you convert a non-residential building into a:

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods.

Your services can be zero-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 6.6.

A ‘relevant housing association’ is a:

It’s advisable to hold evidence to show that your customer is a relevant housing association, such as a copy of their registration certificate, as you may be asked by HMRC to show why your services are zero-rated.

If you’re converting the building into a building intended for use solely for a ‘relevant residential purpose’, you must also hold a certificate confirming the intended use of the building. Further information on certificates can be found in section 17.

Subcontractors services are not made directly to a relevant housing association and are, therefore, not zero-rated (see paragraph 2.1.2).

A ‘non-residential conversion’ takes place when:

It’s converted into a building:

Examples of a ‘non-residential conversion’ into a building designed as a dwelling or number of dwellings include the conversion of:

The conversion of a garage, occupied together with a dwelling, into a building designed as a dwelling is not a non-residential conversion.

The term ‘garage’ not only covers buildings designed to store motor vehicles but also buildings such as barns to the extent that they’re used as garages.

But if it can be established that the garage was never used to store vehicles or has not been used as a garage for a considerable period of time prior to conversion, its conversion into a building designed as a dwelling can be a non-residential conversion.

A building is ‘used as a dwelling’ when it has been designed or adapted for use as someone’s home and is so used. The living accommodation need not have been self-contained or to modern standards. So, buildings that have been ‘used as a dwelling’, include:

If you convert these types of property into a building ‘designed as a dwelling or number of dwellings’, or intended for use solely for a ‘relevant residential purpose’, then, unless the 10-year rule applies, your services cannot be zero-rated.

You cannot normally zero rate work to a property that has previously been lived in. Subject to the conditions at paragraph 6.1.2, the exception to this is where, in the 10 years immediately before you start your work, it has not been lived in and following the work it is ‘designed as a dwelling’ or intended for use solely for a ‘relevant residential purpose’.

If the property starts being ‘used as dwelling’ or for a ‘relevant residential purpose’ whilst your work is being carried out, then any work that takes place after that point is not zero-rated.

You may be required to show that that the building has not been lived in during the 10 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.

If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 10 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in he should write with their best estimate. We may then call for other supporting evidence.

When considering when a dwelling was last lived in, you can ignore any:

A ‘guardian’ is a person who is installed in a property by the owner or on behalf of the owner to deter squatters and vandals. They may pay a low rent on terms that fall short of a formal tenancy. Alternatively, they may be paid to occupy the property.

A ‘guardian’ is to be distinguished from a caretaker or housekeeper who lives permanently in the property. Property occupied by a caretaker or housekeeper is likely to be furnished throughout.

If the dwelling has been lived in on an occasional basis (for example, because it was a second home) in the 10 years immediately before you start your work you cannot zero rate your supply.

To qualify for zero rating, the conversion must only use non-residential parts of the building.

For example, if you convert a 2-storey public house containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ - see paragraph 6.3.1) into 2 flats, 1 being created out of the bar areas and 1 being created out of the private living area, only the conversion of the former can be zero-rated.

On the other hand, if the conversion uses a mixture of non-residential parts of the building and other parts, none of your services can be zero-rated.

None of your work would be zero-rated and you could not apportion your charge if you converted a 2-storey public house, containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ - see paragraph 6.3.1) into either a:

You can zero rate work to construct a new garage, or to convert a non-residential building into a garage, provided that the:

Your services are supplied in the course of the conversion when you:

The supply of architectural, surveying, consultancy and supervisory services is always standard-rated.

For an explanation of when a standard-rated supply takes place under different types of building contracts and the treatment of ‘design and build’ contracts see paragraph 3.4.1.

Goods hired on their own are always standard-rated. Examples of standard-rated hire are given at paragraph 3.4.2.

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services (for more information see VAT guide (VAT Notice 700)). Such supplies are not zero-rated under the rules in this section.

Buildings and construction (VAT Notice 708)

You can only zero rate your work when the new qualifying residential accommodation is created wholly from a non-residential building or part of a building - see paragraph 6.3.5. If this is not the case you cannot apportion your charge. But, you must apportion your charge on a fair and reasonable basis between qualifying conversion work and other work you do at the same time.

You convert a shop into a flat and refurbish existing flats above the shop that have been lived in within the last 10 years. You can zero rate the work to convert the shop but not the refurbishment of the flats.

Where a service is supplied in part in relation to the conversion of a non-residential building and in part for other purposes, a fair and reasonable apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

A road that serves the building being converted and a neighbouring house (for example, a barn and a farmhouse) is upgraded as part of the conversion. As the road serves both buildings, the work carried out relates, in part, to the conversion and, in part, for other purposes. The liability of upgrading the road may be apportioned on a fair and reasonable basis.

If you decide not to make an apportionment then none of your work can be zero-rated.

7. Reduced rating the conversion of premises to a different residential use

If you carry out work to an existing building you will normally have to charge VAT at the standard rate. You may be able to charge VAT at the reduced rate of 5% if you’re converting premises into a:

The remainder of this section explains the detailed conditions that need to be met before you can reduce rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods. If you install goods that are not building materials (such as carpets or fitted bedroom furniture) you must also standard rate your installation charge. This is explained further at paragraph 7.6.

Your services can be reduced-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 7.7.

The following table summarises the types of conversion that are ‘qualifying conversions’. For full details you should read the appropriate paragraph.

DwellingsSingle household dwellings - see paragraph 14.4 - after conversionMultiple occupancy dwellings - see paragraph 14.5 - after conversionRelevant residential purpose building - see paragraph 14.6 - after conversion
Single household dwellings before conversionNot normally a qualifying conversion, but if there’s a change in the number of single household dwellings see paragraph 7.3see paragraph 7.4see paragraph 7.5
Multiple occupancy dwellings before conversionsee paragraph 7.3Not a qualifying conversionsee paragraph 7.5
Relevant residential purpose building before conversionsee paragraph 7.3see paragraph 7.4Not a qualifying conversion
Any premises not listed, such as a building that has never been lived insee paragraph 7.3see paragraph 7.4see paragraph 7.5

A qualifying conversion is carried out when the premises being converted is a building, or part of a building, and after the conversion the premises contains a greater or lower number (but not less than one) of ‘single household dwellings’ (see paragraph 14.4), but not where the number of ‘single household dwellings’ in part of the premises is unchanged (see paragraph 7.3.1).

A qualifying conversion includes the conversion of:

It does not include the:

Work that is unrelated to changing the number of dwellings cannot be reduced-rated.

A block of flats consists of 4 floors, each with 4 flats. A lift is installed and work is carried out throughout the whole building. On the ground, first and second floors the footprint of each flat is changed to take account of the new lift. This results in the internal configuration of each flat being changed. On the third floor 3 penthouse flats are created from the original 4.

Although the overall number of single household dwellings in the building has changed (there has been a reduction by one unit) only the work to convert the third floor will be eligible for the reduced rate because it is only in this part of the building that the number of dwellings has changed. But see also the next example.

Taking example 1, if the reduction in the number of flats on the third floor happens by combining 2 of the original flats together, the other 2 being refurbished, then the reduced rate will only apply to the work to merge the 2 flats together.

Taking example 1, as well as the changes to the top floor, the number of flats on the ground floor is changed to 5 smaller units. In this example, the overall number of dwellings in the building has not changed (there are 16 units both before and after the work). But as parts of the building are examined independently, and because the respective parts of the building meet the conditions at paragraph 7.3, the reduced rate can apply to the work to convert those parts.

A qualifying conversion is carried out when a building, or part of a building, before conversion does not contain any multiple occupancy dwellings (see paragraph 14.5). After conversion, the premises contain only one or more multiple occupancy dwellings and the premises are not intended to be used to any extent for a relevant residential purpose (see paragraph 14.6).

A qualifying conversion includes the conversion into a multiple occupancy dwelling of a:

It does not include, for example, the creation of additional bedrooms at a dwelling consisting of bedsits.

A qualifying conversion is carried out when the premises being converted are one or more buildings or parts of buildings. Before conversion, those premises must not have been last used to any extent for a relevant residential purpose (see paragraph 14.6). After conversion, those premises are intended to be used solely for a relevant residential purpose.

A qualifying conversion includes the conversion into premises that will be used solely for a relevant residential purpose of a:

It does not include:

Other than installing goods that are building materials (see paragraph 13.8 for examples of building materials), you can also reduce rate any works of 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 building.

You can also reduce rate works within the immediate site of the premises being converted that are in connection with the:

All other services are standard-rated. For example, you must standard rate:

You can reduce rate the:

This is provided both these conditions are met:

But you cannot reduce rate the provision of a hardstanding unless it is also used as an access.

If you carry out work that requires statutory planning consent or statutory building control and it has not been granted, then your work is standard-rated.

You can only reduce rate those services detailed in paragraph 7.6 when they’re supplied in the course of a qualifying conversion. If your services cover a wider range of work then you may apportion your charge on a fair and reasonable basis. If you decide not to make an apportionment then none of your work can be reduced-rated.

8. Reduced rating the renovation or alteration of empty residential premises

If you carry out work to an existing building you will normally have to charge VAT at the standard rate. You may be able to charge VAT at the reduced rate of 5% if you’re renovating or altering either:

The remainder of this section explains the detailed conditions that need to be met before you can reduce rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods. If you install goods that are not building materials (such as carpets or fitted bedroom furniture) you must also standard rate your installation charge. This is explained further at paragraph 8.4.

Your services can be reduced-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 8.5.

‘Qualifying residential premises’ means a:

The premises being renovated or altered must be used solely for a ‘relevant residential purpose’ after the works have been carried out. The recipient of your supply must confirm this by giving you a certificate - see section 17.

Where a building, when last lived in, was one of a number of buildings on the same site used together as a unit for a relevant residential purpose (such as a number of buildings that together formed a care home) you need not renovate or alter all of the buildings for the reduced rate to apply. But those that are renovated or altered must be used together as a unit solely for a relevant residential purpose and a certificate issued.

You can only reduce rate the renovation or alteration if, in the 2 years immediately before renovation works start, the qualifying residential premises has not been lived in.

If the premises is a building (or part of a building) which, when last lived in, was 1 of a number of buildings on the same site used together as a unit for a relevant residential purpose, then none of the buildings making up the original unit must have been lived in during the 2 years immediately before your work starts. So you cannot, for example, reduce rate the renovation or alteration of a dormant building within the grounds of an operational home or institution.

If you reduced-rated your supply, you may be required to show that the building has not been lived in during the 2 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.

If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 2 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in, they should write with a best estimate. We may then call for other supporting evidence.

You can ignore any use that is:

A ‘guardian’ is a person who is installed in a property by the owner or on behalf of the owner to deter squatters and vandals. They may pay a low rent on terms that fall short of a formal tenancy. Alternatively, they may be paid to occupy the property.

A ‘guardian’ is to be distinguished from a caretaker or housekeeper who lives permanently on the property. Property occupied by a caretaker or housekeeper is likely to be furnished throughout.

If the dwelling has been lived in on an occasional basis (for example, because it was a second home) in the 2 years immediately before you start your work you cannot reduce rate your supply.

There are 2 empty house rules for situations when people are living in the premises while refurbishment work is being carried out. The first relates to all qualifying premises (see paragraph 8.2). The second only relates to ‘single household dwellings’.

If the ‘qualifying residential premises’ have not been lived in during the 2 years immediately before your work starts, all of your work is reduced-rated. This is the case even if the premises start to be lived in again while you are carrying out your work. The occupier must move in on a day after you start your work.

But if, when your work starts, the premises are already being lived in, or have been lived in during the previous 2 years, all of your work is standard-rated.

You can reduce rate your services of the refurbishment or alterations to a ‘single household dwelling’ where all the following conditions are met:

This exception to occupation will not apply to the renovation or alteration of multiple occupancy dwellings or buildings intended for use for a relevant residential purpose.

Other than installing goods that are building materials (see paragraph 13.8 for examples of building materials), you can also reduce rate any works of 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.

You can also reduce rate works within the immediate site of the dwelling that are in connection with the:

All other services are standard-rated. For example, you must standard rate:

If premises consisting of a single household dwelling, multiple occupancy dwelling, or building used for a relevant residential purpose are renovated or altered at the reduced rate, you can also reduce rate the:

Both the following conditions must be met:

But you cannot reduce rate the provision of a hardstanding unless it is also used as an access.

If you carry out work that requires statutory planning consent or statutory building control and it has not been granted, then your work is standard-rated.

You can only reduce rate those services detailed in paragraph 8.4 when they’re supplied in the course of a qualifying renovation or alteration. If your services cover a wider range of work then you may apportion your charge on a fair and reasonable basis. If you decide not to make an apportionment then none of your work can be reduced-rated.

9. Transitional historical arrangements

Transitional historical arrangements for zero rating approved alterations to the first grant of a major interest in protected buildings.

This section has been retained because although all zero rating for approved alterations ended in September 2015 the information contained within it may still be required.

Prior to 1 October 2012 work undertaken in the course of an approved alteration to a protected building (but not including works of repair and maintenance) was treated as zero-rated. With effect from that date the zero rate has been withdrawn.

To mitigate the impact of the change a transitional relief was applied until 30 September 2015.

This means that supplies of approved alterations were standard-rated with effect from 1 October 2012 unless they qualified for:

For the remainder of this section present tense is retained although the conditions it describes are now historic.

Under the transitional arrangements, zero rating will continue to apply where in respect of the works a ‘relevant consent’ was applied for before 21 March 2012 or a written ‘contract’ was entered into before 21 March 2012; this included contracts already underway on 21 March 2012 (providing that this is supported by evidence).

For most buildings relevant consent means listed building consent. But where the building is a listed place of worship that is exempted from the usual listed building controls under section 60 of the Planning and (Listed Buildings Conservation Areas) Act I990 it will refer to whatever consent for the approved alterations is required by the competent authority.

The contract referred to in the transition arrangements is the written contract with the builder, not the architects’ plans, planning permission and so on.

The changes apply to the listed places of worship. But the government has extended the scope of the listed places for the worship grant scheme so that it covers alterations as well as repairs.

Applicable to works eligible for the period of transitional relief ending 30 September 2015.

If you carry out work to an existing building you will normally have to charge VAT at the standard rate. You may be able to zero rate your supplies if you’re involved in altering a listed building or scheduled monument which will:

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods.

Your services can be zero-rated when all of the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 9.7.

A protected building is a building that is either a listed building (see paragraphs 9.3.2 and 9.3.3) or a scheduled monument (see paragraph 9.3.4) and is:

A listed building is one included in a statutory list of buildings of special architectural or historic interest compiled by the Secretary of State for National Heritage in England and by the Secretaries of State for Scotland, Wales and Northern Ireland.

In England and Wales there are 3 categories of listed building, Grade I, Grade II*, and Grade II. In Scotland the equivalent categories are Grade A, Grade B and Grade Cs. In Northern Ireland the equivalent categories are Grade A, Grade B+ and Grade B.

Buildings within the curtilage of a listed building such as outhouses or garages which, although not fixed to the building, form part of the land and have done so since before 1 July 1948 (for example, an outhouse) are treated for planning purposes as part of the listed building.

Unlisted buildings in conservation areas, or buildings included in a local authority’s non-statutory list of buildings of local interest, which used to be known as Grade III buildings, are not ‘protected’ buildings for VAT purposes.

As noted in paragraph 9.3.2, garages and other curtilage buildings can be treated for planning purposes as part of the listed building.

For VAT purposes any approved alteration carried out to such buildings can only be zero-rated if the building being altered falls within 1 of the descriptions in paragraph 9.3.1. For example, the conversion of an outhouse in the curtilage of a dwelling to a swimming pool cannot be zero-rated as that building is not ‘designed to remain as or become a dwelling’ in its own right.

Approved alterations to garages in the curtilage of a building ‘designed to remain as or become a dwelling’ can be zero-rated provided that the garage is occupied together with the dwelling, and was either constructed at the same time as the dwelling or, where the dwelling has been substantially reconstructed, at the same time as that reconstruction.

A garage need not be a building designed to store motor vehicles, the term can also apply to a building adapted to store motor vehicles such as a barn.

A scheduled monument is one included in a statutory schedule of monuments of national importance as defined in the Ancient Monuments and Archaeological Areas Act 1979 or the Historic Monuments and Archaeological Object (Northern Ireland) Order 1995.

You can only zero rate an approved alteration to a scheduled monument if it’s a building that meets the tests at paragraph 9.2.1.

A building is altered when its fabric, such as its walls, roof, internal surfaces, floors, stairs, windows, doors, plumbing and wiring is changed in a meaningful way.

Alterations carried out for the purposes of repair or maintenance, or any incidental alteration resulting from works of repair or maintenance, are always standard-rated, even if the work has been included in the listed building or scheduled monument consent.

Works of repair or maintenance are those tasks designed to minimise, for as long as possible, the need for, and future scale and cost of, further attention to the fabric of the building. Changes to the physical features of the building are not zero-rated alterations if, in the exercise of proper repair and maintenance of the building, they’re either:

Similarly, if the amount of work or cost is significant, that does not make the work a zero-rated alteration if the inherent character of the work is repair and maintenance.

The following are examples of repair or maintenance work and alterations. Remember you can only zero rate alterations when all of the conditions in paragraph 9.1.2 are met.

WorkVAT treatment
ExtensionsAlteration
Opening or closing doorwaysAlteration
Replacement of rotten wooden windows withuPVCdouble glazingRepair or maintenance
Replacement ofuPVCdouble glazing with copies of original wooden windows for aesthetic reasonsAlteration
Installing a window where one did not exist beforeAlteration
Re-felt and batten roofRepair or maintenance
Replacement of a flat roof with a pitched roofAlteration
Replacement of straw thatch with reeds and changes to the ridge detail of a thatched roofRepair or maintenance when carried out as part of the normal renewal programme
Damp proofingRepair or maintenance
Making goodFollows the liability of the main work
Re-decoratingRepair or maintenance
Re-pointingRepair or maintenance
Re-wiringRepair or maintenance
Extending wiring and plumbing systemsAlteration
Replacing a boiler with a larger capacity boiler whilst extending plumbing systemsAlteration
Flood lightingAlteration when installed on the building, but neither an alteration nor repair or maintenance (and therefore standard-rated) when installed within the grounds of a building - there is no work to the fabric of the building

The Department of Culture Media and Sport administers a grant scheme for repairs to listed places of worship. The scheme can refund the full amount of VAT spent on eligible repairs, but this will depend on the funds available. Further information on the scheme can be obtained from:

Listed Places of Worship Grant SchemePO Box 609NewportNP10 8QD

Telephone: 0845 601 5945Website: www.lpwscheme.org.uk

Paragraph 9.3.3 explains that approved alterations to existing curtilage structures only qualify for zero rating when the structure is a protected building.

The construction of a building or structure in the grounds of a protected building is never an alteration of a protected building and is not zero-rated under the rules in this section. But zero rating may be available under the rules in section 3.

The construction of (and the alteration to) fences, walls and railings (both freestanding and attached to the protected building) and other curtilage structures, such as patios and terraces, are standard-rated.

In most cases an approved alteration is an alteration for which listed building consent is both needed and has been obtained from the appropriate planning authority (or, in some circumstances, the Secretary of State) prior to the commencement of the work. In each case you will need to find out from your customer (or their architect or surveyor) to what extent the work you have been contracted to do has both required and received listed building consent.

If you’re working on a church, a building on Crown or Duchy land, or a scheduled monument, you should read paragraphs 9.5.4, 9.5.5 and 9.5.6 respectively.

Listed building consent is not the same as planning permission. In general terms, listed building consent is needed for work on a listed building which would affect its character as a building of special architectural or historic interest. The construction of an extension, or alterations following partial demolition, would certainly require consent but it’s not possible to generalise about less radical work especially as regards internal alterations.

If you carry out work to a listed building without obtaining any required listed building consent, you’re committing an offence.

The planning authority cannot issue retrospective listed building consent for the work. But they may permit you to keep the unauthorised works. Such works are not approved alterations (because consent has not been granted at the time the work is carried out) and are standard-rated.

Where works to a listed building are carried out without listed building consent being obtained or which do not comply with a condition in the consent, the local planning authority may issue a ‘listed building enforcement notice’ for the carrying out of further work.

An alteration, which is not work of repair or maintenance, see paragraph 9.4, to the fabric of the building under the terms of an enforcement notice is an approved alteration.

Many listed places of worship are not subject to the usual controls over listed buildings. This is known as ecclesiastical exemption and it exempts a place of worship from listed building and conservation area control. It does not exempt the place of worship from being charged VAT on those works.

In England and Wales 6 Christian denominations have ecclesiastical exemption. They are the:

In Scotland and Northern Ireland, all listed places of worship that are in ecclesiastical use, are exempt from listed building controls, although they’re still subject to planning controls.

Any alteration, which is not work of repair or maintenance (see paragraph 9.4) to the fabric of a listed place of worship that has ecclesiastical exemption, is an approved alteration.

Ecclesiastical exemption does not extend to dwellings occupied by ministers of religion and the normal listed building consent procedure applies.

Listed building consent may not be needed for alterations to buildings on Crown or Duchy land even though it would be needed for similar alterations to listed buildings elsewhere.

In this case, an alteration to the fabric of the building which would otherwise have required consent and which is not work of repair or maintenance (see paragraph 9.4), is an approved alteration.

All works affecting scheduled monuments require scheduled monument consent from the Secretary of State. Approved alterations are those works of alteration for which consent has been obtained.

It’s possible for a building to be both scheduled and listed. If so, only scheduled monument procedures apply and it should be treated as a scheduled monument for VAT purposes.

Your services are supplied ‘in the course of an approved alteration’ of a protected building when you:

So, even if your work did not require approval (see paragraph 9.5) it can still be zero-rated provided it’s closely connected to an approved alteration. Examples include:

The supply of architectural, surveying, consultancy and supervisory services is always standard-rated.

For an explanation of when a standard-rated supply takes place under different types of building contract and the treatment of design and build contracts, see paragraph 3.4.1.

Goods hired on their own are always standard-rated. Examples of standard-rated hire are given at paragraph 3.4.2.

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services - see VAT guide (VAT Notice 700) for more information. Such supplies are not zero-rated under the rules in this section.

Works of repair or maintenance are standard-rated. If you’re supplying both zero-rated and standard-rated work you may apportion your supply on a fair and reasonable basis to reflect the differing liabilities.

If you decide not to make an apportionment then none of your work can be zero-rated.

You cannot zero rate work to a whole building where only part of it is a ‘protected’ building. But you can zero rate the work to the qualifying parts. For example, if you carry out alterations to a listed building used by a charity, it may be that only part of the building will be used solely for a ‘relevant charitable purpose’. If so, only the approved alterations to that part of the building can be zero-rated.

Where a service (such as the carrying out of civil engineering work) is supplied in part in relation to an approved alteration and in part for other purposes, a fair and reasonable apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

If you decide not to make an apportionment then none of your work can be zero-rated.

10. Zero rating the sale of, or long lease in, substantially reconstructed protected buildings

Prior to 1 October 2012 zero rating applied to the first grant of a major interest by a person substantially reconstructing a protected building. (A major interest means the freehold (or in Scotland the absolute interest) or a lease for over 21 years (not less than 20 in Scotland).)

With effect from 1 October 2012 the zero rate for the first grant of a major interest in a substantially reconstructed protected building has been withdrawn in those cases where zero rating relies on three-fifths of the work (measured by cost) being approved alterations.

But zero rating continues to apply where the first grant of the major interest relates to a protected building substantially reconstructed from a shell (as explained further within this section).

To mitigate the impact of the change a transitional relief will apply until 30 September 2015.

The first grant of a major interest in a substantially reconstructed protected building, where three-fifths of the work (by cost) relates to approved alterations will be eligible for zero rating where either:

The conditions for zero rating the sale of, or long lease in substantially reconstructed buildings (and applicable to works eligible for the period of transitional relief ending 30 September 2015).

The rules will continue to be relevant for sales and long leases (grants of major interests), after 30 September 2015, where these relate to a protected building substantially reconstructed from a shell.

The sale of, or lease in, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT, depending on the circumstances. If you substantially reconstruct a listed building that after the reconstruction:

You may be able to zero rate your first sale of, or long lease in, the property.

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your supply.

For an explanation of when a developer cannot recover input tax on goods incorporated in a zero-rated building see section 12.

If you cannot zero rate your supply you should read Land and property (VAT Notice 742) to determine if your supply is standard-rated or exempt. Remember, you cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable (including zero-rated) and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. Further information can be found in Partial exemption (VAT Notice 706).

Your supply can be zero-rated when all the following conditions are met:

For an explanation of when you may need to apportion your charges see paragraph 10.9.

A protected building is a building that is either a listed building (see paragraphs 9.3.2 and 9.3.3) or a scheduled monument (see paragraph 9.3.4) and is:

A protected building is substantially reconstructed when:

A protected building is not ‘substantially reconstructed’ where the only major alteration is the addition of an extension.

But work to extend a protected building could be zero-rated as an approved alteration if supplied by a builder. This means that if you carry out major works to reconstruct a building, then the construction of an extension can count towards your 60% ‘substantial reconstruction’ calculation.

You may reconstruct a building where only part of it will be used for a qualifying purpose. When determining if at least 60% of the work could be zero-rated as ‘approved alterations’, all of the work to the building should be considered. But only those alterations to the qualifying parts can count towards the zero-rated element.

You’re granting a major interest in a building when you sell, assign or surrender:

A holiday home is a ‘building designed as a dwelling or number of dwellings’ where the person buying or leasing the property is:

The sale or long lease of a holiday home cannot be zero-rated.

If, after reconstruction, the building is less than 3 years old when the sale or long lease is made, the sale or long lease is standard-rated. If the building is 3 years old or more, the sale or long lease is exempt. The long lease is exempt to the extent that the consideration is in the form of a premium.

Any subsequent payments for a lease, such as ground rents and service charges, are standard-rated.

Further information can be found in Hotels and holiday accommodation (VAT Notice 709/3).

You’re a ‘person substantially reconstructing’ a protected building if, in relation to that building, you’re acting as, or have, at any point in the past, acted as a:

The status is transferable. You have inherited person substantially reconstructing status when you acquired a substantially reconstructed protected building as part of aTOGC. Conditions a), b) and c) at paragraph 4.5.6 also apply.

For VAT purposes, any business carried on by a member of a VAT group is treated as carried on by the representative member. But when determining whether a supply can be zero-rated, ‘person substantially reconstructing’ status is only considered from the perspective of the group member who, in reality, makes the supply. This might not be the representative member.

For example a VAT group includes a:

Sometimes the beneficial owner of a property must register for VAT instead of the legal owner - further information can be found in Land and property (VAT Notice 742). In such circumstances the beneficial owner must have ‘person substantially reconstructing’ status before the sale or long lease of the property can be zero-rated.

Subject to the conditions at paragraph 10.1.2, you can only zero rate your first sale of, or long lease in (see paragraph 4.2) a building (or part of a building). Zero rating is not affected by:

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT - for further information see Land and property (VAT Notice 742).

The grant of a major interest between 2 members of the same VAT group is ignored for VAT purposes. It’s the first grant of a major interest to a person outside of the group that’s the first grant for the purposes of zero rating. The member of the group making that grant must have ‘person substantially constructing’ status (see paragraph 10.7.1).

If you’re making a zero-rated sale of, or entering into a long lease in, a building or dwelling you can normally zero rate with the sale or long lease:

Further information on grants of parking facilities with dwellings can be found in Land and property (VAT Notice 742).

You can also zero rate a garage constructed or converted from a non-residential building provided that both the following conditions are met:

If you sell or long lease a reconstructed building and only part of it will be used for a qualifying purpose, then you must apportion your charge. This is explained further at section 16.

If you sell or long lease a development site containing buildings that qualify for zero rating as substantially reconstructed protected buildings (or parts of buildings) and other buildings, you must apportion the liability of your charge between them on a fair and reasonable basis.

11. Supplies of building materials by contractors

If you’re a retailer, a builder’s merchant, or supplying goods from stock, you must standard rate most goods that you sell. There are some exceptions such as the supply of protective boots and helmets for industrial use (see Protective equipment (VAT Notice 701/23)) and printed manuals (see Zero rating books and printed matter (VAT Notice 701/10)). For an overview of those goods that can be supplied at the zero or reduced rate see VAT guide (VAT Notice 700).

The VAT treatment of goods supplied in connection with certain building services supplied to disabled people or to charities serving the needs of such people is explained in Reliefs from VAT for disabled and older people (VAT Notice 701/7).

If you’re a builder, the rate of VAT you charge for your work normally determines the rate of VAT you charge on any goods you ‘incorporate’ in the building (or its site) - see paragraph 13.3 - whilst carrying out that work. So, if your work is zero-rated or reduced-rated, then so are the goods.

This is only the case where the goods that you’re incorporating into the building are ‘building materials’. For an explanation of what goods are ‘building materials’ see section 13.

If the goods are not ‘building materials’, you must charge VAT at the standard rate on the supply of those goods.

If you’re working on a zero-rated project, you can still zero rate the service of incorporating standard-rated goods in the building. But if you’re working on a reduced-rated project, you cannot reduced-rated the incorporation of standard-rated goods that are not building materials; you must standard rate both elements of your charge.

In summary:

Are the goods ‘building materials’? (see paragraph 13.2)If the liability of your service of incorporating the goods in the building isthen the liability of the goods is
YesZero-ratedZero-rated
YesReduced-ratedReduced-rated
YesStandard-ratedStandard-rated
NoZero-ratedStandard-rated
NoStandard-ratedStandard-rated

If you’re a contractor, you can deduct input tax on both goods that are ‘building materials’ and goods that are not ‘building materials’ provided they relate to taxable (that is, standard-rated, reduced rate or zero-rated) supplies that you make.

12. Developers - building materials and other goods

You will need to know if the goods are ‘incorporated’ in the building (or its site). This is explained at paragraph 13.3.

Goods that are incorporated in a zero-rated building (or part of a building) are zero-rated as part of your zero-rated supply of the building. But you may be ‘blocked’ from reclaiming input tax. This is explained further at paragraph 12.2.

Goods that are not incorporated in the building, such as loose furniture, are liable to VAT at the standard rate. You’re not ‘blocked’ from reclaiming input tax.

You can normally deduct input tax on costs that you use, or intend to use, in making taxable (including zero-rated) supplies. But if you intend to make a zero-rated sale or long lease in a building, you cannot deduct input tax on goods that meet both following 2 conditions:

Typically, this means that you cannot reclaim input tax on items such as carpets, most fitted furniture, and most ‘incorporated’ gas and electrical appliances.

You’re not blocked from deducting input tax when the following conditions are met:

On new housing developments one or more of the houses are often used temporarily for promotion purposes as show houses. But the ultimate intention of the developer is normally to make a zero-rated sale or long lease in them.

Here you’re ‘blocked’ from deducting input tax on goods that are not ‘building materials’ in the same way as for other houses.

If you remove the goods from a property to which ‘blocking’ applies and sell them independently (for example, the carpet may need replacing or your customer may prefer a different model appliance), you’re still ‘blocked’ from deducting input tax on both the original item and any replacement. Your disposal of the original item is exempt from VAT.

13. The VAT meaning of ‘building materials’

If you’re a contractor supplying zero-rated or reduced-rated services described in this notice, the ‘building materials’ you supply with those services and ‘incorporate’ in the building (or its site) will also be zero-rated or reduced-rated. Other articles are normally standard-rated - see section 11.

If you’re a developer, you may be ‘blocked’ from deducting input tax on goods that cannot be zero-rated to you. There are also other implications for supplies you may make - see section 12.

For VAT purposes, ‘building materials’ are articles that meet all of the following conditions:

An article is ‘incorporated’ in a building (or its site) when it’s fixed in such a way that its fixing or removal would either:

Examples of articles ‘incorporated’ in a building (or its site) include:

Examples of goods that are not ‘incorporated’ in a building (or its site) include free-standing:

An article is ‘ordinarily’ incorporated in a building (or its site) when, in the ordinary course of events, it would normally be incorporated in a building of that generic type, such as a dwelling, church, or school. Generic types of building are not split into sub-categories. So, no distinction is drawn between large detached houses and small terraced houses.

The same approach is taken when determining if the goods themselves are the norm for that type of building. For example, a tap would be regarded as being ‘ordinarily’ incorporated whether it is chromium or gold-plated.

Examples of articles ‘ordinarily’ incorporated in different types of building can be found in paragraph 13.8.

The range of items ‘ordinarily’ incorporated in a building is likely to change over time in line with trends and consumer expectations.

Finished or prefabricated kitchen furniture and materials for the construction of fitted kitchen furniture are building materials for VAT purposes when ordinarily incorporated in a building.

Examples of articles that are not furniture and are building materials for VAT purposes, include:

(a) basic storage facilities formed by becoming part of the fabric of the building, such as airing cupboards and under stair storage cupboards

(b) items that provide storage capacity as an incidental result of their primary function, such as shelves formed as a result of constructing simple box work over pipes, and basin supports which contain a simple cupboard beneath, and

(c) basic wardrobes installed on their own with all the following characteristics:

The wardrobe should feature no more than a single shelf running the full length of the wardrobe, a rail for hanging clothes and a closing door or doors. Wardrobes with internal divisions, drawers, shoe racks or other features are furniture and are not building materials.

All other finished or prefabricated furniture and materials for the construction of fitted furniture are not building materials for VAT purposes, such as:

Most devices that are powered by electricity or gas are not building materials for VAT purposes, even if they’re required to be incorporated in a building as a requirement of Building Regulations. Electrical and gas appliances are building materials when they’re:

Appliances powered by other fuels are building materials when they are ordinarily incorporated in the building. For example, solid fuel or oil-fired cookers are building materials.

Carpets, carpet tiles and underlay are not building materials for VAT purposes.

Other forms of flooring or floor covering, such as linoleum, ceramic tiles, parquet and wooden floor systems are building materials.

Articles accepted as being ‘ordinarily’ incorporated in a building (or its site) are listed in paragraph 13.8.1. This is not a complete list. Remember, these articles are only building materials for VAT purposes when they meet all the conditions in paragraph 13.2.

Articles incorporated into a building are:

These buildings may include all of the articles in paragraph 13.8.1 and in addition can include:

The buildings can include:

See paragraph 13.8.3 but in addition:

See paragraph 13.8.3 but in addition:

Examples of articles are:

Cookers cannot be considered to be ‘space heaters’ just because they incidentally radiate heat while operating. To be classified as ‘designed to heat space or water, they must be fitted to a heating module or boiler.

14. An explanation of dwellings, ‘relevant residential purpose’ and ‘relevant charitable purpose’

The zero-rated and reduced-rated supplies described in this notice are limited to supplies involving certain types of dwellings, ‘relevant residential purpose’ buildings and ‘relevant charitable purpose’ buildings.

This section explains the meaning of the terms used in the rest of this notice. Section 15 explains what to do if only part of the building is qualifying accommodation.

A building is ‘designed as a dwelling or number of dwellings’ where the building contains a dwelling or more than one dwelling and in relation to each dwelling the following conditions are satisfied:

If in doubt as to whether these conditions are satisfied, further information can be found in the VAT Construction Manual.

This definition applies when zero rating the:

An occupancy restriction is a prohibition on separate use or disposal, see paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

A building is ‘designed to remain as or become a dwelling or number of dwellings’ where the building contains a dwelling or more than one dwelling and, in relation to each dwelling, all of the following conditions are satisfied:

If in doubt as to whether these conditions are satisfied, further information is available in the VAT Construction Manual.

The definition applies when zero rating:

An occupancy restriction is a prohibition on separate use or disposal, see paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

It’s a dwelling that meets all of the following conditions:

If in doubt as to whether these conditions are satisfied, further information is available in the VAT Construction Manual.

The definition applies when reduced rating the:

An occupancy restriction is a prohibition on separate use or disposal, see paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

A ‘house in multiple occupation’ is a dwelling that meets all of the following conditions:

If in doubt as to whether these conditions are satisfied, you can find further information in the VAT Construction Manual.

The definition applies when reduced rating the:

An occupancy restriction is a prohibition on separate use or disposal, see paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

A multiple occupancy dwelling is normally a dwelling where an occupant will have some personal space and facilities (such as a bedroom or a bedsit) and will share other facilities with other occupants. Examples of such dwellings are a block of bedsits or a cluster flat.

Multiple occupancy dwellings do not include:

‘Relevant residential purpose’ means use as:

(a) a home or other institution providing residential accommodation for children

(b) a home or other institution providing residential accommodation with personal care for people due to old age, disablement, past or present dependence on alcohol or drugs, or past or present mental disorder (see paragraph 14.6.6)

(c) a hospice (as long as that hospice provides some residential accommodation, such as beds for patients)

(d) residential accommodation for students or school pupils

(e) residential accommodation for members of any of the armed forces

(f) a monastery, nunnery or similar establishment

(g) an institution which is the sole or main residence of at least 90% of its residentsbut not used as a:

The definition is when:

The terms ‘home’ and ‘institution’ apply to categories (a), (b) and (g) in paragraph 14.6.1.

It’s often important to know whether the building is, itself, used as a ‘home’ or ‘institution’. For example, a bedroom block constructed in the grounds of a registered care home cannot be zero-rated as the construction of a building intended for use solely for a relevant residential purpose because it’s not, in itself, a ‘home’ or ‘institution’ but part of a larger ‘home’ or ‘institution’.

There are some exceptions, explained in the relevant sections, when a group of buildings can be considered together. For example, a number of buildings constructed at the same time on the same site that are intended to be used together as a unit solely for a relevant residential purpose can be zero-rated - see section 3.

To determine if a building (or group of buildings) is intended to be used as a ‘home’ or ‘institution’, all relevant factors need to be considered including:

The term ‘residential accommodation’ applies to categories (a), (b), (d) and (e) in paragraph 14.6.1.

By ‘residential accommodation’ we mean lodging, sleeping or overnight accommodation. For example, accommodation for students attending a residential training course is ‘residential accommodation’.

If you wish to establish whether accommodation is accepted by HMRC as of a type provided to students you should establish whether the persons are recognised as falling into the category of ‘student’.

A building containing living accommodation is not ‘residential accommodation’ unless the building contains sleeping accommodation. For example, if the only living accommodation in a building is a dining hall then that’s not ‘residential accommodation’.

But a dining hall that’s to be constructed at the same time as another building (or buildings) containing sleeping accommodation with the intention that they’re to be used together to provide living accommodation, is ‘residential accommodation’.

If a building contains both bedrooms and a dining hall then both parts are ‘residential accommodation’.

But the dining hall must be intended for use in conjunction with the sleeping accommodation in that building. Use by persons sleeping in other buildings prevents the dining hall from being ‘residential accommodation’ unless all the buildings involved were constructed together and were intended to be used collectively as living accommodation. To fall within the zero rate, all of the buildings must be intended to be used together solely (95% or more) by residents living in the accommodation, their guests and those who look after the building

There was an informal concession that allowed dining rooms and kitchens to be zero-rated as residential accommodation for students and school pupils if they were used ‘predominantly’ by the live in students, this was not included in this Notice after 1995.

The rules for applying the concession were that the dining room or kitchen must be owned by the educational establishment and not a third party. The dining hall concession allowed the construction of dining halls to be zero-rated if constructed at the same time as student accommodation and if residents in that student accommodation made up at least 50% of the users of the dining hall.

This concession was formally withdrawn on 1 April 2015.

The term ‘personal care’ applies to category (b) in paragraph 14.6.1.

By ‘personal care’, we mean assistance with washing, eating and so on, but can also include such medical treatment as is necessary to contain a condition or to assist towards a person’s rehabilitation.

It means use by a charity in either or both of the following ways:

Charities are non-profit distributing bodies established to advance education, advance religion, relieve poverty sickness or infirmity or carry out certain other activities beneficial to the community.

For construction purposes, a charity must meet the criteria set out in How VAT affects charities (VAT Notice 701/1), paragraph 2.1.

The charity must be recognised by HMRC and, where required, registered with the appropriate regulator.

If a charity is not currently recognised by HMRC, they can apply for recognition online.

Suppliers must take reasonable steps to check that their customer holds appropriate charitable status. Charities claiming zero rating can demonstrate that they have charitable status with their Charity Commission registration number or with HMRC’s letter confirming charitable status (the letter has the code CTY001 at the bottom).

Organisations that are not registered with a regulator or recognised by HMRC can apply to HMRC for recognition.

Community amateur sports clubs (CASCs) do not hold charitable status. Whilst they may be entitled to certain tax reliefs, unlike charities there are no specific VAT reliefs forCASCs. An organisation is recognised as aCASCby HMRC with a letter showing CTY24 at the bottom left hand corner.

The definition applies when zero rating:

Information on what is meant by ‘business’ can be found in VAT guide (VAT Notice 700), How VAT affects charities (VAT Notice 701/1) and Education and vocational training (VAT Notice 701/30).

Remember, activities that do not make a profit, or activities where any profit is only used to further the aims and objectives of the charity, can still be business activities.

Buildings typically seen as not being used for business purposes include:

Buildings typically seen as being used for business purposes:

A building falls within this category when there’s both a:

Users of the building need not be confined to the local community but can come from further afield.

Any part of the building which cannot be used for a variety of social or recreational activities cannot be seen as being used as a village hall.

The term ‘similar’ refers to buildings run by communities that are not villages but who are organised in a similar way to a village hall committee. It does not include buildings that provide a range of activities associated with village halls but who are not organised on these lines.

In order to be similar to a village hall, a charity would have trustees who are drawn from representatives of local groups who intend to use the hall. The trustees would therefore be made up of individuals from say the Women’s Institute, the Bridge Club, the Amateur Dramatics Society, and so on. The building would be hired out to the local community for a modest fee for use by a range of local clubs and groups, and also for wedding receptions, birthday parties, playgroups and other leisure interests. Whilst, the size, and level of provision and facilities will be decided by the local community, we would at the very least expect the principal feature of a village hall to be a large multi-purpose hall where members of different households can meet to undertake shared activities.

The emphasis for a village hall should be on promoting the use of the facilities for the benefit of the whole community rather than for the benefit of one particular group. An important characteristic is that the building must be available for use by all sectors of the community. It must therefore be capable of meeting the social and recreational needs of the local community at large and not be predominantly confined to a special interest group. It should also be arranged on a first come first served basis and no single group should have priority over all the others.

On the other hand, a building designed for a particular sporting activity, for example, a cricket pavilion or football clubhouse and ancillary facilities is not seen as being similar to a village hall. Whilst these types of buildings are often made available to the wider community; this would be required to fit in around the sports club’s usage. In essence it would be the sports club who would determine how the building was to be used and not the wider community.

Buildings that are not typically seen as being similar to village halls are:

Buildings that are seen as being similar to village halls when the characteristics noted are present:

15. Relevant residential purpose accommodation that’s designed as dwellings

For the vast majority of buildings potentially eligible for zero rating, you will know from the outset whether you’re constructing or purchasing a new building that is designed as a dwelling or is intended to be used solely for a relevant residential purpose (RRP). But since the zero rate for dwellings is based on the design of the building and forRRPsbased upon its use, HMRC accepts that there may be instances where a building could qualify for zero rating under both of these provisions at the same time. In such cases, a taxpayer is free to rely on either provision to achieve zero rating for their building.

For example, if a building is intended to be used solely for aRRPbut also meets all the conditions of Note 2 to Group 5 of Schedule 8 of the VAT Act 1994 (in that it takes the form of a building designed as a dwelling or number of dwellings), each taxpayer is free to rely on either note for zero rating. This can give flexibility as to how a building is used.

This also means that the planning permission does not necessarily determine the VAT treatment. In this example, the planning permission is for student accommodation and that is how the developer is using the building but, the building also meets the conditions of a building designed as a dwelling and so can also rely on Note 2 for its zero rating.

Developments are zero-rated if they meet the conditions of Note 2 to Group 5 of Schedule 8 of the VAT Act 1994 (a building designed as a dwelling or a number of dwellings) or Note 4 of Group 5 to Schedule 8 of the VAT Act 1994 (a building intended for use solely for aRRP).

Note 2 is a design test which requires that in order for a building to be ‘designed as a dwelling or a number of dwellings’ it must meet 4 conditions:

We consider that the dwelling must have the basic elements of living and so would expect there to be a kitchen, bathroom, sleeping area and living area. At the minimum, we would expect 2 rooms, one a bathroom and the other providing an area that had facilities for living, cooking and sleeping (for example, a studio flat). You can read more on this in the VAT Construction Manual.

In the case of a studio flat we would expect, at the very least, to see in the living or sleeping room, an area that could be used for the purpose of food preparation and so will usually include a sink, storage for cups and utensils and so on, worktop, space for a fridge and means of cooking (for example, a cooker, hob or oven). If no cooking appliance is installed, we expect there to be an appropriate connection for such an appliance (for example, cooker ring, main circuit or gas pipe designed for connecting to a cooker or similar built-in appliances). A general plug socket only, perhaps intended for the use of a microwave oven, kettle or toaster is unlikely to be sufficient unless most of the other features of a kitchen are also present.

It can also include what are sometimes termed ‘cluster flats’. These are single flats (in this instance, have their own front door) and will typically contain a number of en-suite bedrooms let to individual students. Within the cluster flat will also be a kitchen and common area to be used by all occupants of that flat.

There’s no direct internal access when you cannot move from one dwelling to another dwelling or part of a dwelling, without first moving across an area outside the dwelling, such as a landing or corridor. But if there’s a fire door connecting one dwelling to another, we would not see this door as failing this condition.

But we would expect the door to be fitted with an appropriate fire door lock and must be intended to be secured at all times other than in the event of a fire or fire test. If the door is capable of being routinely opened to allow occupants to move freely from one dwelling to another, we would see this as failing this condition.

Separate use or disposal means that the use or disposal of the dwelling must not be tied to another building, structure or even land. If it’s tied it fails this condition. Accordingly, the condition will normally exclude ‘granny’ annexes constructed in the grounds of a main house; and where a dwelling cannot be used or sold separately from other premises, such as a caretaker’s house at a school or assisted living units within the grounds of care or nursing homes. You can read more on this in the VAT Construction Manual.

In the example of a development like student accommodation where the dwellings take the form of studio or cluster flats, we would expect that there are no conditions or prohibitions under the terms of the planning consent that prevents individual flats from being sold or leased. but this condition is still met if any prohibition on the sale of individual flats arises as a result of a financial agreement (for example, terms of mortgage or finance of the property) or from agreements to let the accommodation to students of a particular university or other educational body.

To meet this condition, the dwelling that meets conditions (a) to (c) must have been granted planning permission and have been constructed or converted in accordance with that consent. This will be a matter of fact in each case. But variations to the planning consent, resulting in a change in appearance, or to the composition or distribution of the accommodation, will normally be accepted. More radical departures resulting, for example, in a much larger dwelling being constructed, will fail to satisfy the condition, unless there is evidence that the planning authorities have decided not to pursue the matter. You can read more on this in the VAT Construction Manual.

Note 4 is a use based test that requires a building to be intended for use solely for aRRPby falling into one of 7 categories listed in paragraph 14.6.1.

A change of use charge can arise where a building or part of a building has been zero-rated on the basis that it is intended to be used solely for anRRP. It applies if, within a 10-year period, the building is used for another purpose or the entire interest in it is sold. If any of these events occurs you, as the person who received the zero-rated supply, will be liable to account for VAT on a self-supply. This means that you may need to account for output tax on the building or part of the building that was originally zero-rated, subject to an adjustment to reflect the period of time it was used for a relevant use.

More information on the change of use provisions are in section 19.

Use solely for a relevant charitable purpose (see section 17) does not count as a change of use.

Different rules apply where the building was completed before 1 March 2011 (see paragraph 19.2).

1) The enlargement or extension of an existing building is zero-rated to the extent it creates an additional dwelling or dwellings (see paragraph 3.2.4). This does not apply in other cases where the enlargement or extension is intended to be used solely for aRRP.

2) Some residential conversions are reduced-rated (see section 7). For example, a reconfiguration of the premises is reduced-rated if it creates a different number of dwellings (see paragraph 7.3), but not if it creates a different number of units in a building or part of a building intended solely for aRRP.

3) Under Note 4, construction services are only zero-rated or reduced-rated when supplied to a person who intends to use the building solely for a qualifying purpose. Therefore, subcontractors cannot make use of the certificate and must standard rate their supply. But if the building is designed as dwellings, and is not being considered under Note 4, supplies by subcontractors are zero-rated or reduced rate in the same way as for a main contractor (see paragraph 2.1.2).

Some student accommodation and other residential developments may sometimes include facilities such as a dining hall or laundry in a separate building. Note 5 of Group 5 to Schedule 8 of the VAT Act 1994 allows such buildings to be zero-rated where they’re constructed at the same time as the residential accommodation and are intended to be used with it. To fall within the zero rate, all of the buildings must be intended to be used together solely (95% or more) by residents living in the accommodation, their guests and those who look after the building.

Assuming the student accommodation was eligible to be zero-rated under both Notes 2 and 4, the construction of the dining hall or laundry could only be zero-rated under Note 5 if the building was eligible to be zero-rated under Note 4.

If, within 10 years of practical completion, a building intended to be used for a relevant residential purpose is put to a non-relevant use or disposed of, a self-supply charge may become due (see section 19).

For example, a block of student accommodation which on its own would be eligible for zero rating under both Note 2 and Note 4 has been constructed together with a separate dining hall or laundry (for use solely for the occupants, their guests and staff who look after the building), which could only be zero-rated under Notes 4 and 5. If a change of use charge arises, no VAT would be chargeable on the student block as this would have been eligible for zero rating as a dwelling at the time of construction.

But a self-supply VAT charge would arise for the separate dining hall or laundry which could never have qualified for zero rating as dwellings under Note 2.

Would a building that could be zero-rated under both Note 2 and Note 4 still be zero-rated under Note 2 if care is also provided?

The test for Note 2 is whether the building meets all the requirements set out in that Note. Note 2 does not refer to intended use so zero rating will apply provided that all the requirements are met. In the event that it’s intended that a care package would be provided, this should not make any difference.

But in order for the test in Note 2(c) to be satisfied, the separate use or disposal of the dwelling must not be ‘prohibited by the terms of any covenant, statutory planning consent or similar provision’ so the provision of a care package may prevent the building from meeting this condition.

Where accommodation is provided as the grant of a major interest together with an extensive 24 hour, 7 days a week care package, we would generally see 2 separate supplies, but where the accommodation is rented, or is subject to short lets, the liability will be determined by what is supplied and how it is held out.

For example, if the supply is for accommodation and a set care package all for one rate or price, this is indicative of a single supply. But the provision of accommodation, together with care as and when required by the resident, indicates that separate supplies are being made.

It’s difficult to cover all cases as the liability will be determined by the supply position. But, unless there’s a major interest granted there can be no zero rating at all, irrespective of the level and nature of care provided.

The VAT liability of supplies made by sub-contractors is dependent upon whether or not the building will be built relying on Note 2 (building designed as a dwelling) or Note 4 (RRPbuilding). In the case of Note 2, the subcontractors supplies will be zero-rated and under Note 4, standard-rated for VAT.

Where the contractor is constructing a building for a client that’s eligible to be built under Note 2 or Note 4, we expect the contractor to determine the liability of their supplies and those of any subcontractors based upon the actions of the client.

If the client gives a VAT certificate, then the building will be built under Note 4 and the subcontractors supplies will be standard-rated. If no certificate is given, then the subcontractors supplies are zero-rated.

Once the client takes possession of the completed building, they’re still free to rely on Note 2 or Note 4 for any supplies they make. Since the building was correctly constructed at the time (either under Note 2 or Note 4) there’s no requirement for the contractor or subcontractors to amend the VAT treatment of their supplies if say, the building was built under Note 4 and the client subsequently relies on Note 2 for supplies they make of the completed building or vice versa.

Where a contractor is constructing a building eligible to be zero-rated under Note 2 or Note 4 but there is no client, then the contractor is free to determine whether they’re building dwellings or aRRPbuilding.

Again, if the building is built relying on Note 4 but is subsequently supplied on relying on Note 2, there is no requirement to revisit the liability of the supplies made by the subcontractors.

16. Apportionment for part qualifying buildings

Where only part of a building consists of qualifying accommodation (such as a building consisting of shops with flats above), your supply (which may be building work or the sale or lease in the property) must be zero-rated or reduced-rated to the extent that it relates to the qualifying parts.

If your supply only relates to the qualifying parts of the building then you charge VAT at the zero rate or reduced rate as appropriate.

Similarly, if your supply only relates to the non-qualifying parts of the building then you cannot zero rate or reduced rate your charge.

If your supply relates in part to qualifying parts of the building and in part to non-qualifying parts, you can only zero rate or reduced rate your supply to the extent that it relates to the qualifying parts. A fair and reasonable apportionment should be made.

Building work that relates to the fabric of the building affecting both qualifying and non-qualifying parts of the building must be apportioned, such as work to:

Typically, blocks of flats consist of individual dwellings and areas for the use of all residents, such as a lounge, laundry and refuse area and, occasionally, gym, pool and leisure facilities. The first sale of each flat is zero-rated and the buyer also acquires a right to use the communal areas.

Where the communal areas are only used by residents and their guests, we accept that the construction of the whole building is zero-rated. Where the communal areas are partly used by others, then the construction of the communal areas is standard-rated.

A live-work unit is a property that combines, within a single unit, a dwelling and commercial or industrial working space as a requirement or condition of planning permission.

Zero rating or reduced rating is only available to the extent that the unit comprises the dwelling, provided that the dwelling meets the normal conditions outlined in paragraphs 14.2 to 14.5.

Dwellings that contain a home office are not live-work units and no apportionment is needed.

Units where the work area is shown as a discrete area of floor space, in an office or workshop, must be apportioned to reflect the presence of the commercial element.

Where planning permission requires that a minimum amount of the unit (for example 20%) must be used for commercial or industrial purposes, the remaining amount (that is 80%) can be treated as being the dwelling element for VAT purposes.

But it may be treated for VAT purposes as if it were entirely a dwelling and no apportionment is required where a unit has neither:

If the commercial or industrial areas are treated as if they’re part of the dwelling, see paragraph 16.4.1, then the following rules apply to the whole unit:

If the commercial or industrial areas are not treated as part of the dwelling, then the following rules apply to those parts:

If you have sold the building as a transfer of a going concern, the transaction may be outside the scope of VAT. Further information can be found in Transfer a business as a going concern (VAT Notice 700/9).

Further information on exempting the sale and lease of buildings and opting to tax is in Land and property (VAT Notice 742) and Opting to tax land and buildings (VAT Notice 742A).

The rules in paragraph 16.4.2 apply to the dwelling part of the building.

If you’re making a supply in connection with a building intended for use as residential accommodation for students (see paragraph 14.6.4) or school pupils, or residential accommodation for members of any of the armed forces you can only zero rate or reduced rate your supply to the extent that it relates to the ‘residential accommodation’.

If you’re making a supply in connection with a building intended for use as a home or other institution, zero rating or reduced rating is not restricted to the residential accommodation but can extend to other areas within the buildings such as administration offices, leisure or educational facilities.

17. Certificates for qualifying buildings

You need to hold, within your business records, a valid certificate when you make any zero-rated:

There’s no requirement to hold a certificate for zero-rated or reduced-rated supplies in connection with buildings that will be used as one of the types of dwelling described at paragraphs 14.2 to 14.5.

Possession of a valid certificate does not mean that you can automatically zero rate or reduce rate your charge. The certificate merely confirms that the building is intended to be used solely for a qualifying purpose. You must meet all of the conditions explained in the relevant sections of this notice to zero rate or reduce rate your supply.

You must also take all reasonable steps to check the validity of the certificate. If this includes corresponding with your customer to confirm the details of the use of the building, you should retain such correspondence within your records.

If you have taken all reasonable steps to check the validity of the certificate and acted in good faith, you will not normally be asked to account for VAT if the certificate is subsequently found to have been issued in error. The wording of this concession is reproduced in Notice 48: Extra Statutory Concessions (Concession 3.11).

If you’re a contractor working to a main contractor, you should not be issued with a certificate. You must always standard rate your supply when working on a certificated building.

The customer for the zero-rated or reduced-rated work issues the certificate. The certificates at section 18 can be used, or the issuer can create their own certificate provided it contains the same information and declaration.

If you’re a customer, you must issue your certificate before your supplier makes their supply. But HMRC will allow your supplier to adjust their VAT charge on receipt of a belated certificate provided that both of the following conditions are met:

Your supplier cannot make an adjustment with HMRC if they’re restricted from doing so under the 4 year ‘capping’ rules - see Notice 700/45: how to correct VAT errors and make adjustments or claims.

The 2 available certificates confirm that you’re either eligible to receive:

You should issue whichever certificate is appropriate.

If you issue an incorrect certificate, you may be liable to a penalty equivalent to the amount of VAT not charged. A penalty is not VAT and, if you’re registered for VAT, you will not be able to recover it as input tax.

A penalty will not be issued, or will be withdrawn, if you can demonstrate that there’s a reasonable excuse for issuing the incorrect certificate.

If you’re obtaining building work, your declaration will confirm to your supplier one of the following:

a) For the purpose of zero rating or reduced rating, as the recipient of construction services, that you intend to use the building, or part of the building for a qualifying process that is:

b) For the purpose of reduced rating that, as the recipient of the works of residential renovations and alterations that the building is to be used (although not necessarily by you) for a qualifying process that is:

For example, a charity A has a building constructed, part of which the charity will occupy and use solely for a qualifying purpose. The charity will sub-let the remaining part to another charity B, who will occupy and use the part solely for a qualifying purpose.

As the building is intended to be used solely for a qualifying purpose, charity A can issue a certificate to its building contractor and have the supplies of construction services (and associated materials) zero-rated.

But if an investment company has a residential care home built and leases the property to an operating company who will run the care home, the investment company cannot issue a certificate to its building contractor as it’s not occupying the building and using it for a qualifying purpose.

If you’re buying a building, or a long lease in a building, your declaration confirms to your supplier that the building, or the part of the building, on which you’re seeking zero rating is intended to be used solely for a qualifying purpose that is:

That use need not be necessarily by you alone, it can be in conjunction with tenants of yours.

For example, a charity A enters into a 99 year lease with the developer for a building, part of which the charity will occupy and use solely for a qualifying purpose. The charity will sub-let the remaining part to another charity B, who will occupy and use the part solely for a qualifying purpose.

As the building is intended to be used solely for a qualifying purpose, charity A can issue a certificate to the developer and have first grant of a major interest zero-rated.

Similarly, if an investment company purchases the freehold of a residential care home from a developer and leases the property to an operating company who will run the care home, the investment company can issue a certificate to the developer and have the sale of the freehold zero-rated.

Normally, when considering, for VAT purposes, how an item is used, HMRC will look to the economic use to which that item is put as determinative. But, for the purposes of the zero and reduced rates for qualifying buildings, it’s the occupational use of the building that determines the correct VAT treatment.

A building (or part) is not used ‘solely’ for a qualifying purpose when it’s:

But you can ignore up to 5% non-qualifying use.

Any calculation method can be used to demonstrate 95% or more qualifying use provided it produces a fair result. We consider a result to be fair if the method used:

Examples of calculation methods can be found in the VAT Construction Manual.

18. The certificates

This certificate has force of law.

PDF, 96.3KB, 3 pages

This certificate has force of law.

PDF, 95.1KB, 3 pages

19. Changing the use of certificated buildings

If you have obtained zero rating for the construction or acquisition of a building (or part of a building) because you certified that it would be used solely for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, we expect that the building will be used solely for either or both of those qualifying purposes for a period of, at least, 10 years following completion of the building.

If the building ceases to used solely for either or both of those qualifying purposes within that 10-year period, if that use decreases or if the building is disposed of, a taxable charge comes about, on which you must account for VAT.

There are 2 sets of rules that govern how this taxable charge comes about and how it’s calculated. One set of rules applies to buildings completed before 1 March 2011. The other set of rules applies to buildings completed on or after 1 March 2011.

Both these sets of rules only apply if you have met the following conditions:

These sets of rules do not apply to if you have received a supply in connection with a certificated building that was zero-rated under the rules in sections 9 and 10.

These sets of rules do not apply if the building is demolished to ground level within 10 years of completion.

A taxable charge arises when, within 10 years of completion of the building, you either:

Completion takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

If you sell or lease the building (or part), the charge is based on the value of the sale or lease that relates to those parts of the building that originally benefited from zero rating. VAT is calculated at the standard rate current at the time of the sale or lease.

If you change your own use of the building (or part), the charge is based on the value of the original zero-rated supply relating to the building (or part). VAT is calculated at the standard rate current at the time of that zero-rated supply.

You do not make adjustments for changes in the market value of the property. You can make an adjustment on a pro rata basis for the years (if any) when you used the building solely for either or both of the qualifying purposes.

Number of complete years before the change in useVAT charge (as a percentage of the the VAT that should have been charged)
0100%
190%
280%
370%
460%
550%
640%
730%
820%
910%
10 or more0%

A charity paid £1 million for a new building. The building was intended to be used by the charity solely for a non-business purpose so the charity did not incur £175,000 VAT (the standard rate of VAT being 17.5% at the time).

After 2 and a half years (2 complete years), the charity changed its use of the building to a business purpose.

VAT due on original supply had it not been zero-rated = £175,000

VAT due to HMRC = £175,000 × 80% = £140,000

If you sell or lease the building (or part), the VAT charged on your supply is declared as output tax on your VAT Return for the VAT period in which the supply takes place.

If you change your own use of the building (or part), the tax charge that comes about is a self-supply charge. You declare the VAT calculated as output tax (as if you had made a supply) on your VAT Return for the VAT period in which the change in use occurs. You can then treat this VAT as deductible input tax to the extent that it relates to any other taxable supplies that you make.

You may need to make subsequent adjustments to the amount of tax that you deduct if both the following conditions apply:

Further information on input tax adjustments can be found in Capital Goods Scheme (VAT Notice 706/2).

If you are not registered for VAT, you may have become liable to be registered for VAT because of these taxable charges.

Further information on registration can be found in Notice 700/1: should I be registered for VAT?.

If you do not become liable for registration, you are not required to account for the VAT charges calculated.

A taxable charge arises when, within 10 years of completion of the building, you:

Completion takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

In all the circumstances where a taxable charge arises, the charge is based on the value that will yield an amount of VAT that is equal to the VAT that would have been charged had the building (or part) not qualified for the zero rate. That value is adjusted according to the:

VAT is calculated at the standard rate current at the time of the ‘change in use’ or disposal.

A taxable charge can arise more than once in the 10 years immediately following completion. For example, in the third year following completion, the use of a building for a qualifying purpose decreases from 100% to 75%. Two years later, there’s a further decrease from 75% to 50%. Each decrease will require a taxable charge to be calculated.

A charity constructs or acquires a new building at the zero rate of VAT because they have certified that they intend use the building solely for a non-business purpose. The value of the zero-rated supply was £5 million. The standard rate of VAT at the time of supply was 20%. The building consists of 5 floors.

During the first 5 years, the building was used as intended. After 5 years, the charity decides that they will use the top floor of the building for a business purpose.

VAT of £100,000 on a self-supply charge will need to be accounted for. That has been calculated as follows:

Therefore the value of self-supply = £5 million × 20% × 50% = £500,000.

VAT @ 20% = £500,000 × 20% = £100,000

A charity constructs or acquires a new building at the zero rate of VAT because they have certified that they intend to use the building solely for a non-business purpose. The value of the zero-rated supply was £5 million. The building consists of 5 floors.

During the first 5 years, the building was used as intended but at the end of the fifth year, the charity sold its entire interest in the building. VAT of £500,000 will need to be accounted for on a self-supply charge, calculated as follows:

Had the standard rate of VAT at the time of the original zero-rated supply not been 20%, the value of the self-supply would have to be adjusted. Examples of this adjustment and further examples of the ‘change in use’ calculation can be found in the VAT Construction Manual.

The tax charge that comes about is a self-supply charge. You declare the VAT calculated as output tax (as if you had made a supply) on your VAT Return for the VAT period in which the change in use occurs. You can then treat this VAT as deductible input tax to the extent that it relates to any other taxable supplies that you make.

You may need to make subsequent adjustments to the amount of tax that you deduct if both the following conditions are met:

Further information on input tax adjustments can be found in Capital Goods Scheme (VAT Notice 706/2).

Where the taxable charge arises because the building has been sold, the seller, as well as accounting for a self-supply charge based on the original zero-rated supply, will also have to account for the actual supply that is, the disposal of its freehold or leasehold interest in the building.

If you’re not registered for VAT, you may have become liable to be registered for VAT because of these taxable charges.

Further information on registration can be found in Notice 700/1: should I be registered for VAT?.

If you do not become liable for registration, you are not required to account for the VAT charges calculated.

20. Zero rating the development of residential caravan parks

Civil engineering work necessary for the development of permanent parks for residential caravans is zero-rated. Your services can be zero-rated when all of the following conditions are met:

You cannot zero rate work that’s not civil engineering work, such as the construction of:

The park being developed must only be for residential caravans.

A residential caravan is one in which residence throughout the year is not prevented by the terms of a covenant, statutory planning consent or similar permission. The development of a holiday park of fixed caravans, or parks for touring caravans, is, therefore, normally standard-rated.

Examples of zero-rated civil engineering work include:

Works that are unnecessary (and are standard-rated) include the construction of:

You cannot zero rate the reconstruction, alteration or improvement of an existing work, such as widening or upgrading an existing road.

The separate supply of architectural, surveying, consultancy and supervisory services is always standard-rated.

For an explanation of when a separate standard-rated supply takes place under different types of building contract see paragraph 3.4.1.

Goods hired on their own are always standard-rated. Examples of standard-rated hire are given in paragraph 3.4.2.

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services - for more information see VAT guide (VAT Notice 700). Such supplies are not zero-rated under the rules in this section.

Works of reconstruction, alteration or improvement are standard-rated - see paragraph 20.4.1. If you’re supplying both zero-rated and standard-rated civil engineering work you must apportion your supply to reflect the differing liabilities.

Where a service is supplied in part in relation to necessary civil engineering work and in part for other purposes, an apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

If you decide not to make an apportionment then none of your work can be zero-rated.

21. Place of supply of construction services and working overseas

The place of supply of services directly related to land or property is where the land itself is located, irrespective of where you or your customer belongs. Place of supply of services (VAT Notice 741A) provides examples of services that are, and are not, directly related to land and property. You should also refer to this notice for detailed guidance on the place of supply of construction and other land-related services.

If the place of supply of your construction services is the UK (including the Isle of Man but not the Channel Islands) then your supplies are within the scope of UK VAT and you may need to register and account for VAT. For an explanation of when and how you should register for VAT in the UK see Notice 700/1: should I be registered for VAT?.

If the place of supply of your construction services is outside the UK then your supplies are outside the scope of UK VAT and you do not charge UK VAT to your customer. Your supplies may be subject to VAT in the country where your services are supplied and you may be liable to register and account for VAT there. You should contact the VAT authorities in the country concerned for guidance.## 22. Value of supply - deductions and liquidated damages

If Income Tax is deducted from payments you receive under the Construction Industry Scheme, the value of your supply is the gross amount before Income Tax is deducted.

Any levy payable to theCITB‘sticks’ with the contractor and under the regulations is not passed on in full or in part to the subcontractors.

Where a contractor and subcontractor agree a price for the subcontractor’s supplies, then the value for VAT purposes will be the agreed price, even if the contractor withholds part of the payment as a contribution towards the ‘levy’. The full agreed price should be the amount shown on the invoice and VAT will be due on that amount.

Where a contractor pays the full amount, but then asks the subcontractor to make a contribution towards the ‘levy’. That contribution will be outside the scope of VAT. It will not be a reduction in consideration. Only if the parties renegotiate the price and reduce the value of the supply, by the ‘levy’ amount, will it be a reduction in consideration.

Liquidated damages are agreed pre-estimated sums to be paid in the event of a breach of contract by one of the parties. The amount is either a set figure or determined by a formula.

If you receive liquidated damages, you’re not receiving payment for a supply by you and no VAT is due on that amount.

If you’re due to make a payment for liquidated damages and due to receive from the other party a payment for a supply made by you, you cannot reduce the value of your supply (and therefore cannot reduce the amount of VAT chargeable) even if you set the amounts off against each other.

23. Tax points, authenticated receipts and self billing

Single payment contracts are subject to the normal tax point rules.

If you supply services, the basic tax point is the date when the service is performed. If you issue a VAT invoice or receive a payment before that basic tax point, the actual tax point for the amount you invoice or receive is the date you issue the invoice or receive the payment, whichever happens first.

If you issue a VAT invoice up to 14 days after the basic tax point, the actual tax point is the date that you issue the invoice. If you issue a VAT invoice more than 14 days after the basic tax point, the actual tax point can be either the basic tax point or it can be the date that you issue the invoice.

Further information on tax points can be found in VAT guide (VAT Notice 700).

Retention clauses allow the customer to hold back a proportion of the contract price once the work has been completed, pending confirmation that the supplier has done the work properly and has rectified any immediate faults that might be found.

Under the normal tax point rules, which apply to single payment contracts - see paragraph 23.1.1 - you would be required to account for VAT on any outstanding retention payments at the basic tax point. But there are special rules that apply to retention payments generally. The tax point for the retention element of the contract is delayed until you either receive the retention payment or issue a VAT invoice for it, whichever occurs first.

If, under a contract that provides for periodic payments (often referred to as stage payments or interim payments), you make supplies of services:

In the course of the construction, alteration, demolition, repair or maintenance of a building or of any civil engineering work, the tax point for your supply is the earlier of receipt of payment or the issue of a VAT invoice.

There’s no basic tax point when the work is completed unless the contract is covered by the special anti-avoidance rules that can apply in some cases. Further information on these rules can be found in section 24.

The tax point rules for self-billed invoices and supplies made under the authenticated receipt procedure are explained at Self-billing (VAT Notice 700/62) and paragraph 23.2 respectively.

Under a self-billing arrangement, the customer makes out VAT invoices on behalf of the VAT-registered supplier (for example, a main contractor makes out VAT invoices on behalf of their registered subcontractor) and sends a copy of the invoice to the supplier with the payment. Further information on self-billing can be found in Self-billing (VAT Notice 700/62).

You can only issue self-billed invoices to your suppliers if both the following conditions are met:

You do not need to seek our authorisation to operate self-billing.

The authenticated receipt procedure must not be confused with self-billing - see paragraph 23.2. An authenticated receipt is not a VAT invoice. The procedure allows a supplier to authenticate a receipt for payment and removes the requirement to issue a normal VAT invoice.

You must not use the authenticated receipt procedure when you make a supply under a single payment contract.

The procedure works by customers preparing receipts for supplies they receive and forwarding them to their suppliers with payment. The receipts are only valid for VAT purposes when the supplier has authenticated them. The time limits for the issue of an authenticated receipt are the same as for VAT invoices - see VAT guide (VAT Notice 700). Failure to provide an authenticated receipt is an offence.

The procedure can only be used when all of the following conditions are met:

The issue of an authenticated receipt does not create a tax point in the same way that a VAT invoice does. If you make a supply under a contract providing for periodic payments, the tax point is the date you receive payment or, where the special anti-avoidance rules described in section 24 apply, the date you complete the work.

An authenticated receipt is acceptable as evidence for input tax purposes.

You may claim input tax in the tax period in which your supplier receives the stage payment without waiting for an authenticated receipt but you must obtain and keep a copy of it. Suppliers cannot authenticate a receipt and return it to the customer until they have received the payment.

If you experience difficulty in obtaining an authenticated receipt from a supplier, you should contact HMRC on the third successive occasion that you are unable to obtain one. A claim to input tax may still be allowed if satisfactory alternative evidence is available, or you can show that reasonable efforts were made to secure an authenticated receipt and the claim is otherwise correct.

24. Tax points - the special anti-avoidance rule

This section explains the special tax point rule for construction services (and construction services together with goods) that are supplied in the course of the construction, alteration, demolition, repair or maintenance of a building or civil engineering work and that are made under a contract that provides for periodic payments.

Under the normal rule for contracts that provide for periodic payments - see paragraph 23.1.3 - the tax point for your supply is the earlier of receipt of payment or the issue of a VAT invoice.

If a VAT invoice is not issued, the tax point (and therefore VAT payment) can be delayed. The special anti-avoidance rule counters the VAT effect of contracts where payment does not become due for many years after the completion of the work.

You do not need to read this section if:

If this section does not apply to you, you should follow the normal tax point rules explained in section 23.

If the anti-avoidance rule applies, you will have to account for VAT no later than when you complete your work. The following decision table explains when the anti-avoidance rule applies.

StepDecisionFurther information
1Do you know who will occupy the building or civil engineering work?If ‘yes’, go to step 3If ‘no’, go to step 2paragraph 24.4
2Do any of your subcontractors know who will occupy the building or civil engineering work?If ‘yes’, go to step 4If ‘no’, you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22paragraphs 24.4 and 24.8
3Will you, or someone connected with you, occupy the building or civil engineering work?If ‘yes’, go to step 7If ‘no’, go to step 4paragraphs 24.4 and 24.5
4Will one of your subcontractors, or someone connected with one of your subcontractors, occupy the building or civil engineering work?If ‘yes’, go to step 7If ‘no’, go to step 5paragraphs 24.4, 24.5 and 24.8
5Will someone who gave you finance to pay for the costs of your work, or someone connected with your financer, occupy the building or civil engineering work?If ‘yes’, go to step 7If ‘no’, go to step 6paragraphs 24.4 to 24.6
6Will someone who gave your subcontractor finance to pay the costs of their work, or someone connected with their financer, occupy the building or civil engineering work?If ‘yes’, go to step 7If ‘no’, you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22paragraphs 24.4 to 24.6 and 24.8
7Will the person occupying the building or civil engineering work be doing so wholly or mainly for eligible purposes?If ‘yes’, you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22If ‘no’, you must account for VAT no later than when you complete your work - see paragraphs 24.9 and 24.10paragraph 24.7

A business occupies a building or civil engineering work if its employees work there, or if it uses the building for storing its stock or other assets.

If, when you have completed making your supplies, you genuinely do not know who the intended occupier of the building or civil engineering work is, you do not have to account for VAT on completion unless your subcontractor has to account for VAT when they complete.

The following people are treated as connected:

Relative means a brother, sister, ancestor or lineal descendant. It does not include nephews, nieces, uncles and aunts.

A company is connected with another company if:

For the purpose of the anti-avoidance rules, a company is not treated as ‘connected’ to another company as a result of both being under the control of:

Financing can include:

In addition, there are more unusual forms of finance covered by the anti-avoidance rule. A person provides finance to you, for example, if they:

You are not affected by this anti-avoidance rule if the people who will be occupying the building or civil engineering work will be doing so ‘wholly or mainly for eligible purposes’.

HMRC is of the view that the test is met if the nature of the occupier’s use entitles them to the recovery of, at least, 80% of any input tax incurred in relation to their occupation of the building or civil engineering work.

It’s important to note that the test is whether the occupier of the building or civil engineering work can recover 80% or more of the VAT relating to that building or work. It does not matter whether their overall ability to recover VAT is greater or less than 80%.

These are buildings that are used in the following ways:

These are buildings that are used in the following ways:

If a public, private partnership or private finance initiative arrangement relates to a building that will be occupied exclusively by a government department (including anNHShospital), you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22.

But some public, private partnership or private finance initiative arrangements relate to buildings that will be occupied by private sector businesses too. If the private company is connected with the construction contractor (or a subcontractor) or provides finance to the contractor (or subcontractor), either itself or through an associated business, then the construction contract may be caught by the special anti-avoidance rule.

If for any reason your particular structure is caught, you do not need to account for VAT on the full cost of constructing the entire building when you complete your work. You may, instead, account for VAT only on a proportion of the overall price that fairly reflects the part of the building that will be occupied by the private company.

You’re affected by the anti-avoidance rule if your subcontractors are affected by it. If, for example, a bank gives a loan to your subcontractor specifically to do work on one of their banks, your subcontractor would be affected by the anti-avoidance rule, and so would you.

The anti-avoidance rule has to be drafted this way because otherwise there would be an easy way round it for deliberate VAT avoiders. But we will not be looking to catch you out on a technicality in this area, and if it does come to our attention that you’re inadvertently affected by the rule because of your subcontractors, we will look at your case sympathetically.

‘Completion’ takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

If you’re caught by the anti-avoidance rule, you must account for VAT on the full value of the contract, less any amounts on which VAT has already become due because you received a payment or issued a VAT invoice. The full value of the contract includes retentions and disputed amounts.

Where there’s a dispute, or where it’s not possible to know the exact value of the contract for any other reason, you should make a reasonable estimate of the value. If you’re in dispute with your customer, you do not have to account for VAT on the full amount that you’re claiming from your customer if you feel that you will most likely be forced in the end to settle for a lower amount. You should account for VAT on your best estimate of the amount that will eventually be agreed. (We recommend that you document the basis of your estimate, so that you can later show that it was reasonable.) Later, when the value of the contract is finalised, you will need to make an adjustment to the VAT paid.

25. Self-supply of construction services

You’re deemed to be making a supply to yourself (known as a self-supply) and you must account for VAT on those services in your VAT Return for the period in which you complete the work if, for the purpose of your business (or your VAT group’s business), you use your own or your employees’ labour (where the open market value of that labour is £100,000 or more) to:

You do not account for a self-supply charge if the work would have been zero-rated.

When valuing the supply you must include demolition work carried out at the same time or in preparation for any of the building work but exclude goods and materials, and services that would be zero-rated if supplied by a VAT-registered person.

Input tax incurred on goods and services related to the self-supply charge can be deducted in full, subject to the normal rules.

When you become liable to account for the self-supply charge, you must declare output tax (as if you had made a supply). You can then deduct this as input tax (as if you had made the supply to yourself) to the extent that it relates to any other taxable supplies you make.

If the value of the self-supply is £250,000 or more you may, if the building is used to make exempt supplies, need to make subsequent adjustments to the amount of input tax you deduct. Further information can be found in Capital Goods Scheme (VAT Notice 706/2).

If you are not registered for VAT, the value of the self-supply will make you liable for registration. You must notify HMRC of your liability to register when you know the work will be completed within the next 30 days. You may also register, on a voluntary basis, at an earlier time. Further information on VAT registration can be found in Notice 700/1: should I be registered for VAT?.

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