Hi Kenny,

VAT reclaims can be complicated and your best course of action would be to engage a specialist accountant or advisor, who will be able to advise you with full knowledge of the circumstances. As a general guide, however, it’s true that new self build homes are zero-rated for VAT. So if you were building a new dwelling from scratch, you wouldn’t need to pay VAT on labour (as the contractor shouldn’t charge it) and at the end of the project you would be able to reclaim the VAT on most of the building materials you buy.

The HMRC’s definition of a ‘new dwelling’ is one that’s ‘built from scratch and, before construction starts, any pre-existing building is demolished completely to ground level’. You should take a look at the HMRC’s Notice 708 (buildings and construction), which states in part 3.2.2 that a building does not qualify if the house ‘incorporates a part or parts of an earlier building on the site.’ This includes situations where ‘that dwelling is substantially but not fully demolished in order to comply with the planning permission.’ As you’ve retained two of the original above-ground gable walls, it doesn’t sound like your project falls into this bracket. You can find Notice 708 online via hmrc.gov.uk/vat/

There are exceptions to these rules. For example, if you retain a single facade (or double facade on a corner site) of the original building, then a project can still qualify as zero rated for VAT. But this would only be the case where the retained facade is being kept because of a condition/requirement of planning permission. There are other exceptions, so it would be a wise move to read the relevant sections of Notice 708 to check whether your project qualifies for any relief – although from what you’ve said, I suspect that your project doesn’t qualify under this particular route.

Fortunately, there may be other options open to you. In particular, as you believe your building has been uninhabited for more than 10 years, you may well have a case for the project to be classed as a ‘non-residential conversion’. This kind of conversion project is also zero-rated for VAT, but the process is slightly different (you may initially be charged a reduced rate of VAT on labour) and any claim should be made through the form VAT431C (as opposed to VAT431NB for new dwellings). More information can be found in Notice 708, sections 5 & 6.

If you can’t prove 10 years of non-occupation, then you may still be able to get a VAT reduction through the ‘two-year rule’, which means that contractors can reduce the VAT they charge to 5% on qualifying projects that haven’t been lived in for two years or more. More information can be found in Notice 708, section 8.

It’s important to note that, with all these schemes, if your builder has charged you the wrong amount of VAT and you’ve already paid, you won’t be able to reclaim it from HMRC. You may be able to recover any incorrectly charged VAT from the builder (though this isn’t always possible). The amount of VAT you will be able to reclaim will depend on which of the above categories your project falls into.

Chris Bates, Deputy & Online Editor, Build It magazine