Andrew Needham looks at the circumstances in which a certificate is required for lower-rated construction work.
In certain circumstances, some building work can be subject to a lower rate of 5%. The lower rate applies to the following works:
- Renovating residential property that has been empty for more than two years.
- Where there is a change in the number of dwellings (e.g., converting a house into flats).
- Converting a commercial building into residential use (e.g., a barn conversion).
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Converting a single household residence into a house of multiple occupation (bed-sits).
The 5% rate applies to building services and related materials, but not to separately purchased building materials.
Proof that the 5% rate applies
To apply the 5% rate to building works, the supplier will need to obtain proof that they have applied the 5% rate correctly. In most cases, however, a certificate is not required; but in order to keep HMRC happy, evidence to support the application of the lower rate is required.
Where a customer has a property that has been empty for more than two years, council tax records should be used to support the application of the 5% rate as well as confirmation from the local authority ‘empty properties’ officer where they have one. Where a business is dealing with a ‘change in the number of dwellings’ or a conversion from commercial to residential use or into an HMO, then copies of the planning permission and the architect’s plans should suffice.
5% rate certificates
A certificate is required for the application of the 5% rate when dealing with the renovation of a ‘relevant residential’ building that has been empty for more than two years or the conversion of a property into a ‘relevant residential’ building. The conversion can be either from a non-residential building or from another type of residential property (e.g., a house). A ‘relevant residential building’ is one of the following:
- A residential children’s home.
- A residential student or school accommodation.
- A residential home for the elderly or people in need of care.
- A hospice.
- Residential accommodation for members of the armed forces.
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A convent or monastery.
If a builder is undertaking renovation or conversion works on one of these types of property, they will need to obtain a certificate to support the application of the 5% rate. Sample certificates are shown in VAT Notice 708 para 18, although HMRC states that a customer does not need to use the exact same format providing the information contained in the certificate is the same as in the example given.
Even if a business obtains a certificate, HMRC states that they must also take all reasonable steps to check the validity of the certificate. If this includes corresponding with the customer to confirm the details of the use of the building, the business should retain such correspondence within its records.
If a business has taken all reasonable steps to check the validity of the certificate and acted in good faith, it will not normally be asked to account for VAT if the certificate is subsequently found to have been issued in error.
Belated certificates
The customer should issue the certificate before the builder makes his supply. However, HMRC will allow the supplier to adjust the VAT charge on receipt of a belated certificate provided that:
- the customer can demonstrate that at the time the supply was made, there was an intention that the building would be used in the way being certified, and
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all other conditions for reduced rating were met.
Practical tip
If a business undertakes work on a ‘relevant residential building’ and the 5% rate is applicable, they must obtain a certificate and keep it in their records to substantiate use of the lower rate.
