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Add value by helping clients reduce VAT

Robert Prewett

Awareness of taxation rules for works to existing dwellings means designers can alert clients to possible savings

A project involving the installation of solid wall insulation: this element was reduced rated as an energy saving material.
A project involving the installation of solid wall insulation: this element was reduced rated as an energy saving material.

Many domestic clients are shocked to find that 20% of their construction budget may go directly to HMRC as VAT, which is commonly applied to works to existing dwellings. If they were building a new home for their use it would be 0%.

Some items outside the pure construction budget, such as professional fees and furnishings and carpets, are likely to attract 20% VAT. Under design build contracts, though, professional fees charged to the contractor can avoid VAT.

However there is rather more variability in VAT rates than the above generalisation suggests. A working knowledge of VAT gives designers opportunities to highlight circumstance under which lower VAT rates may apply.

Two key documents that set this information out are: VAT notice 708 buildings construction and VAT notice 708/6 energy saving material

This project, involving the demolition of all but the front facade, qualified for reduced VAT.
This project, involving the demolition of all but the front facade, qualified for reduced VAT.

The first three subheadings below are instances where works to existing buildings may have a lower VAT outcome.

Energy saving materials

VAT notice 708/6 sets out how it can be reduced for certain energy saving materials in, or in the curtilage of, residential accommodation. These are:

  • controls for central heating and hot water systems
  • draught stripping
  • insulation
  • solar panels
  • wind turbines
  • water turbines
  • ground source heat pumps
  • air source heat pumps
  • micro combined heat and power units
  • wood-fuelled boilers

Advocates of a ‘fabric first’ approach to energy conservation will be pleased to see that insulation is on the list. Sadly though, new windows are not included. And while heat pumps are there, MVHR (ventilation with heat recovery) is not.

The reduced rate of 5% applies whether or not the installation is grant funded and includes the price of the goods themselves. If the energy saving materials are supplied without installation, the supply is standard rated.

This rating applies to not only the insulation and its installation but also to works that are ‘ancillary’ to the energy saving aim. The explanation provided in 708/6 notes that the fitting of new loft hatch in conjunction with loft insulation would qualify as ‘ancillary’. Watch out though, if the roof is being entirely replaced – in that case, the insulation would be ancillary to a ‘home improvement’ and therefore would not qualify.

When is a retrofit a new build?

On some projects a single facade (or double faced for corner buildings) is the only part of a building being retained. If this is being done to satisfy a planning condition, then according to notice 708 para 3.2.1, the works can be considered new build from a taxation point of view and the VAT rate is reduced to 0%. Of course there may be instances where strategically this is the most economical solution. One would hope that the designer would also weigh up the embodied carbon consequences of pursuing such an approach, as well as the implications of CDM and other ethical concerns.

How does change of use affect VAT?

Section 7 of notice 708 describes how change of use can reduce rate VAT to 5%. These instances cover conversion where there is a change to the number of dwellings or where a property not previously used as a dwelling is converted to one or more.

Empty properties

Section 8 sets out the qualifying criteria for 5% reduced rating for residential buildings that have not been lived in during the two years immediately before your work starts. Proof will be required and this can be obtained from sources such as Electoral Roll and council tax records, utilities companies, or empty property officers in local authorities.

What is covered by reduced rating?

In relation to energy saving materials the reduced rating only applies to those materials and ancillary products as defined by clause 2.3.2 of notice 708/6.

For other reduced rating areas, one should note that these only cover the installation of ‘building materials’ as defined in section 13. Carpets and fitted bedroom furniture are not classed as building materials. Nor are hired items of equipment such as scaffolding and hire tools.

Who assesses?

Be aware that the person responsible for assessing the taxation rate is the contractor carrying out the works.

As taxation is generally a matter of self-assessment the contractor charging for the works will usually be the person who decides the rating. This can be problematic as the contractor is not incentivised to find ways of reducing the rate for the works. Indeed if he/she were found to have underrated the contribution, HMRC could theoretically pursue them for recovery of tax. As HMRC is not known for its leniency, and contractors are not generally known for their understanding of the nuances of legislation, VAT may be overcharged in some instances.

While architects should not consider themselves tax advisors or prescribe the applicable rate, they should advise clients early in a project what implications design decisions may have in terms of costs generally and costs associated with tax.  Architects may wish to refer their clients to specialists in these matters. As the standard rate of VAT is so high for most works to existing buildings, there is often a strategic advantage to understanding how the varying rates apply. In many instances the correct application of VAT may save a client more that the design fees for the project.

Robert Prewett is a member of the RIBA Sustainability Group and co-founder of Prewett Bizley


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