Cut VAT from 20% to 5% on conversions HMOs & bedsits


Simon Misiewicz

11th January 2016

Are you working on property projects but wish to reduce your VAT?

Would you like to know which categories of spend you are able to reduce VAT on?

There are many people who are illegally reducing VAT and claiming VAT back, many of whom have not intentionally broken the law but illegal is illegal no matter what knowledge people have. I am sure you do not want the VAT man knocking on your door because you have done something like this!

There are also many property investors who are needlessly registering for VAT when they cannot claim back VAT. You cannot claim back VAT on any residential property business activities that are not services related such as lettings/estate agents, conveyancing, etc. The business activity of selling or renting out residential properties is not VAT-able. This means you cannot claim back VAT, whatsoever.

I have previously written a number of articles about how to reduce VAT on a House in Multiple Occupation (HMO), properties that have been empty for more than two years and property conversions from commercial properties to residential.

A note for house conversions into a HMO

VATA 1994 Sched 8 Group 5  and VATA 1994 Sched 7A Group 6 Item 1 state that a conversion from a house to a HMO must meet the below criteria for the 5% VAT reduction to apply.

The work being carried out must result in residential units that meet the following conditions.

  • There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling.
  • The separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision.
  • The separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision.

As confirmed by Gary Dodds of HMRC that a house being converted from a house into a HMO may have the VAT reduced from 20% to 5%. It has taken us 2-3 years and 15 attempts to get HMRC to understand their own legislation / terminology to obtain this conclusion.

On what costs can you reduce VAT from 20% to 5%?

–       Construction materials and labour costs of the building

–       means of providing water, power, heat or access (including putting in new services)

–       means of providing drainage or security

–       provision of means of waste disposal

–       conversion of an outbuilding into a garage

–       construction of a new detached garage

–       the construction of a drive serving the garage

–       Energy efficient/saving materials

What costs cannot be reduced and must remain at the 20% level?

– the installation of goods that are not building materials, such as carpets and fitted bedroom furniture

– the erection and dismantling of scaffolding

– the hire of goods (skips, tools, etc)

– landscaping

– the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors

Next steps to show you how to reduce your VAT bill

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.


Book a call to see how we can help you.