Understand the VAT Nuances: Conversions vs. New Builds

In property development, the VAT treatment differs significantly between new builds and conversions. For new builds, contractors charge zero VAT, meaning that developers do not reclaim any VAT paid on labor. In contrast, conversions incur a 5% VAT charge from the contractor. Developers can reclaim this 5% paid, in addition to the full 20% VAT on materials purchased from suppliers. Therefore, while the ultimate VAT outcome can be zero for both scenarios, the mechanisms of reclaiming VAT are distinct. Misunderstandings often arise, with some believing that the applicable VAT for both types of projects functions as a direct comparison, leading to confusion about reclaiming VAT on material costs. Recognizing that for new builds, contractors should not charge VAT at all clarifies the difference. Meanwhile, contractors in conversion projects may charge 5% due to specific HMRC rulings applicable to those projects. Clear comprehension of these nuances is essential for financial planning and compliance in property transactions.