Residential conversions: the reduced VAT rate

A builder can charge VAT at 5% rather than the standard rate when the work is a qualifying conversion: turning premises such as offices or barns into homes, changing the number of single household dwellings in a building, or converting premises into a house in multiple occupation or a relevant residential building such as a care home. The relief sits in Group 6 of Schedule 7A to the VAT Act 1994 and HMRC explains it in section 7 of VAT Notice 708.

Why is conversion work not simply standard rated?

Work to an existing building is normally standard rated. Notice 708 lists the exceptions, and conversions are one of them: converting a non residential building into a qualifying dwelling, and converting a residential building to a different residential use, both carry the 5% rate (paragraph 2.1). Section 29A of the VAT Act 1994 applies the reduced rate to the supplies listed in Schedule 7A, and Group 6 of that schedule sets out the conditions for residential conversions.

The relief is aimed at the person paying the builder. A homeowner or landlord who cannot reclaim VAT pays 5% instead of the standard rate. A developer who will make zero rated sales can usually recover the VAT anyway, but a lower charge still helps cash flow during the project. For how the different rates fit together, see VAT rates explained.

Which conversions qualify for the 5% rate?

Notice 708 recognises three kinds of qualifying conversion.

• A changed number of dwellings (paragraph 7.3). After the work, the building or the part being converted contains a greater or lower number of single household dwellings, but not fewer than one. This covers a property that has never been lived in, such as an office block or a barn; a bedsit block turned into flats; a pub whose staff accommodation is not self contained; and a house that had been adapted in its entirety to another use, such as offices or a dental practice, being turned back into a home. Splitting one house into two flats, or merging two flats into one house, also qualifies.
• A conversion into a multiple occupancy dwelling (paragraph 7.4). Premises with no multiple occupancy dwellings before the work contain only such dwellings afterwards, and are not intended for any relevant residential use. Converting a family house into bedsits is the typical case.
• A conversion into a relevant residential building (paragraph 7.5). Premises not last used to any extent for a relevant residential purpose become premises intended for use solely for that purpose, for example a large house converted into a care home.

A single household dwelling must be self contained, have no direct internal access to another dwelling, and must not be barred from separate use or separate disposal by a covenant or planning consent (paragraph 14.4.1).

What does not count as a qualifying conversion?

Paragraph 7.3 gives two exclusions that catch people out. Creating living accommodation that is not a single household dwelling, such as most granny annexes, is not a qualifying conversion; see VAT on annexes and extensions. Renovating living accommodation that was used for something else without being adapted, such as a flat above a shop used for storage, is not a conversion either, although the separate relief for renovating empty homes may apply if it has not been lived in for two years.

Remodelling an existing care home, adding outbuildings as extra bedrooms to an existing home, and adding bedrooms to a house already in bedsits do not qualify (paragraphs 7.4 and 7.5).

The test is applied part by part. Paragraph 7.3.1 says work unrelated to changing the number of dwellings cannot be reduced rated. HMRC’s example is a block of 16 flats where a lift is installed, every flat is reconfigured and the top floor goes from four flats to three. Only the work on the top floor gets 5%. If the ground floor were also split into five units, so the overall total stayed at 16, the work on both changed floors would still qualify because each part is examined on its own.

Which parts of the bill can be charged at 5%?

Paragraph 7.6 allows the reduced rate for installing building materials and for repair, maintenance and improvement work to the fabric of the building carried out during the conversion, including building an extension or fitting double glazing. Work within the immediate site that provides water, power, heat, access, drainage, security or waste disposal also qualifies.

Everything else is standard rated, including:

• installing goods that are not building materials, such as carpets and fitted bedroom furniture;
• erecting and dismantling scaffolding;
• hire of goods and landscaping;
• professional services from architects, surveyors, consultants and supervisors.

On a reduced rated project, a builder who installs goods that are not building materials must standard rate both the goods and the fitting (paragraph 11.2). A garage built or converted at the same time as the conversion, and intended to be occupied with the new dwelling, can be reduced rated (paragraph 7.6.1). If the work needs planning consent or building control approval and that has not been granted, the whole job is standard rated (paragraph 7.6.2). Where a contract covers qualifying and other work, the builder may apportion on a fair and reasonable basis; without an apportionment none of it can be reduced rated (paragraph 7.7).

Does the customer need to give the builder a certificate?

Only where the result will be used solely for a relevant residential purpose. Paragraph 17.1 says no certificate is needed for reduced rated work on buildings that will be dwellings or multiple occupancy dwellings. For a relevant residential conversion, the customer issues the certificate before the work is supplied, and a person who issues an incorrect certificate can face a penalty equal to the VAT not charged (paragraph 17.8). A subcontractor working for a main contractor on a certificated building must standard rate (paragraph 17.4).

How does this fit with zero rating and the DIY scheme?

The 5% rate governs what the builder charges. Two other reliefs often sit alongside it.

• Selling the converted homes. Section 5 of Notice 708 zero rates the first sale or long lease of a non residential building converted into dwellings by the person converting it. The building must never have been used as a dwelling, or not used as one in the 10 years before the sale (paragraphs 5.3 and 5.3.2). A developer making zero rated sales can recover the 5% charged by its builders. A pub with accommodation that is not self contained counts as having been used as a dwelling, so selling flats created from it is exempt unless the 10 year rule is met (paragraph 5.3.1).
• Converting for your own family. Someone converting a non residential building into their own home can reclaim the 5% charged by the builder and VAT on building materials through the DIY housebuilders scheme, as HMRC’s conversions guidance explains.

Conversions for relevant housing associations are zero rated under section 6 rather than reduced rated.

What does it look like in numbers?

Illustration only. A developer converts a two storey office into four flats. The builder’s conversion contract, including materials, is £200,000, so VAT at 5% is £10,000 rather than £40,000 at 20%. The developer also pays £8,000 to have carpets fitted and £15,000 in architect’s fees; both are standard rated, adding £1,600 and £3,000. If the developer then sells the flats on long leases as the person converting, the sales are zero rated and all £14,600 can be reclaimed as input tax.

Illustration only. A landlord turns a three bedroom house into two self contained flats at a cost of £60,000. The number of single household dwellings rises from one to two, so the builder charges £3,000 rather than £12,000. The landlord cannot reclaim it because residential letting is exempt, so the saving is a real cost saving. See zero rated vs exempt supplies for why.

What mistakes come up most often?

• Charging 5% on a whole refurbishment when the number of dwellings changes in only one part of the building.
• Treating a granny annexe or a flat with a planning condition tying it to the main house as a single household dwelling.
• Applying 5% to architect’s fees, scaffolding, carpets or fitted bedroom furniture.
• Starting work before planning consent or building control approval is in place.
• Overcharging VAT. A DIY converter cannot reclaim VAT charged in error from HMRC; the builder must put it right. See correcting VAT errors.

What evidence should a builder or developer keep?

Keep the planning consent and approved drawings showing how many dwellings existed before and after, the building control approval, any relevant residential certificate, and the workings behind any apportionment. HMRC’s detailed guidance is in the VAT Construction Manual at VCONST06000, which follows the same structure as section 7 of Notice 708.

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Related Accountapedia entries

• New build homes: VAT zero rating
• Option to tax when converting to residential use
• Charitable and residential purpose buildings: zero rating
• Energy saving materials: the VAT zero rate
• VAT on commercial property: sales and lettings

Sources

• GOV.UK: Buildings and construction vat notice 708
• GOV.UK: Vat refunds for conversions if youre a diy housebuilder
• GOV.UK: Manual page VCONST06000
• GOV.UK: Vat refunds for new builds if youre a diy housebuilder
• GOV.UK: Vat on land and property notice 742

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.