The VAT treatment of property renovations in the UK can be complex, with significant implications for developers and property owners. Understanding the differences is crucial for proper financial planning and compliance.

Standard VAT Treatment for Renovations

Generally, the supply of renovation services for residential properties is exempt from VAT. This stands in stark contrast to new builds, which are zero-rated. The distinction is critical because:

1. For exempt supplies, VAT is not charged on the final service.
2. However, the supplier (e.g., the renovation company) cannot reclaim the input VAT on materials and services used in the renovation.

This arrangement often results in higher costs for the property owner, as the irrecoverable VAT is typically factored into the overall price of the renovation work.

Impact on Input Tax Recovery

The exempt status of most renovation works has a significant consequence: the inability to reclaim input VAT. This means that, unlike with new builds, neither the property owner nor the renovation company can recover the VAT paid on materials and services used in the project. This blocked input tax recovery can substantially increase the overall cost of renovation projects.

While most renovations fall under the exempt category, there are important exceptions where zero-rating applies:

Commercial to Residential Conversions:

• Applies to commercial properties empty for more than 2 years
• The conversion must result in a change of use to residential

Long-Term Empty Residential Properties:

• Applies to residential properties unoccupied for more than 10 years
• The renovation must bring the property back into residential use

In these cases, the supply changes from exempt to zero-rated. This change is significant because:

• No VAT is charged on the final supply (similar to exempt supplies)
• The supplier can reclaim input VAT on materials and services used in the project

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