VAT Considerations When Converting Non-Residential Buildings into Dwellings

Taylor Keeble
Jul 28
3 min read

As demand for housing continues to rise, conversions of non-residential buildings into dwellings are likely to increase. The VAT implications of such projects can be significant, but so too are the opportunities for effective planning. Below, we outline the key issues developers should be aware of to minimise VAT costs and avoid unexpected liabilities.

Acquiring the Property: VAT1614D Certificate

Where the seller has opted to tax the non-residential building, the sale will normally attract 20% VAT. However, if the purchaser intends to convert the property into dwellings or for a qualifying residential use such as care home or student accommodation, issuing HMRC Form VAT1614D prior to exchange of contracts can override the seller’s option to tax, rendering the transaction exempt.

Key requirements:

The form must be signed by an authorised person and provided to the seller before the price is fixed.
It is not submitted to HMRC but must be retained by the seller for audit purposes and for future HMRC enquiry.
No planning permission is required at the time the certificate is issued, but commercial evidence supporting the stated intention should be retained.

This step can deliver significant savings:

SDLT: Calculated on the VAT-inclusive price, so avoiding VAT also reduces SDLT.
Cash flow: Eliminates the need to fund VAT upfront and wait for recovery through returns.

Construction Services: 5% VAT Relief

Construction services associated with converting a non-residential property into dwellings qualify for the reduced 5% VAT rate under VATA 1994 Sch 7A Group 6. This includes labour and materials supplied by contractors but excludes professional services unless part of a "design and build" arrangement.

Scope of relief:

Applies to all building contractors, including electricians, plumbers, and decorators.
Does not apply to services provided directly by architects or surveyors, unless these are supplied through a design and build contract.
No certificate is required to apply the 5% rate for dwelling conversions.

Input Tax Recovery

Input VAT incurred on construction costs (5% for contractor services, 20% for materials or professional fees) is generally recoverable where the developer intends to make zero rated taxable supplies, such as:

Freehold sales
Sale of long leaseholds

If the intention is to sell the units once complete, full recovery of input VAT is usually available.

Change of Intention: Payback and Clawback Rules

Where the developer initially intends to sell but later decides to rent the units (e.g. due to market conditions), this change in intended use can trigger a clawback of input tax previously reclaimed. The payback and clawback rules apply for up to six years from the original recovery.

Conversely, input tax not previously claimed due to an intention to rent may be retrospectively recoverable if the units are later sold.

Planning Options to Mitigate VAT Clawback

If a change of intention occurs post-conversion, the following may reduce or avoid a VAT clawback:

Sale to a connected party

Sell the completed dwellings to a connected company to make a taxable zero-rated supply. The new entity then generates the exempt rental income. This is accepted by HMRC if properly structured but must be assessed in light of other tax implications.

Partial exemption treatment

If the rental arrangement is temporary, and a future sale is still intended, it may be possible to apply a dual-use apportionment of input tax, depending on the proportion of taxable vs exempt use.

Mixed-Use Conversions

Where only part of the property is converted into dwellings (e.g. upper floors) and part remains commercial (e.g. ground floor retail), VAT treatment must be apportioned accordingly. Key points to note here are:

VAT1614D applies only to the residential portion.
Builders should apply 5% VAT to residential works and 20% to commercial.
Shared costs (e.g. roofing, structural work) must be apportioned on a reasonable basis.
To reclaim VAT on commercial areas, the developer may opt to tax the commercial interest, ensuring future supplies (e.g. rental) are taxable and not subject to partial exemption restrictions.

Conclusion

There are generous VAT reliefs available for developers converting commercial buildings into residential units, but these reliefs are only available with correct and timely planning. A proactive approach can significantly reduce SDLT, improve cash flow, and protect input tax recovery.

For developers, timing, documentation, and clarity of intention are critical. Proper use of the VAT1614D certificate, strategic structuring of supplies, and awareness of partial exemption rules can result in substantial tax efficiencies.