Old residential properties: if a residential property hasn't been lived in for 10 years and upon renovation the property is sold, the sale of that property may be zero-rated and so VAT may be recoverable.
Holiday accommodation: if the property will be used for short-term holiday lets, such as AirBnB bookings, the VAT on renovation costs may be recoverable.
Reduced rate (5%) renovations: a reduced VAT rate of 5% can apply where a property has been empty for 2 years or more, or where it is being converted to change the number of dwellings or from non-residential to residential use.
Owner-occupier converters can use the DIY housebuilder scheme. In all other instances renovations will be charged at 20% and will not be recoverable.
This question comes up all the time, usually from landlords who have just spent tens of thousands on a renovation and would like to know if HMRC will give some of the VAT back. The answer is more nuanced than a straight yes or no, and it turns on three things: whether you are renting the property out (residential letting is exempt, which blocks classic input tax recovery), whether the works themselves qualify for the reduced 5% rate at source, and, for anyone converting rather than letting, whether the building counts as non-residential, which flips the position into a fully recoverable one. Getting these right can save meaningful amounts on a project.
- Assuming exempt letting is the same as no VAT at all. It is not. Exempt supplies are in the VAT system, they just do not carry output tax and do not allow input tax recovery. A residential landlord cannot register the letting activity and cannot reclaim the 20% VAT paid on renovation through a VAT return.
- Missing the 5% reduced rate on empty homes. If the dwelling has been empty for two years or more when the works start (VCONST07420), the builder should charge 5% on labour and eligible materials, under section 8 of VAT Notice 708. The saving is at source: the landlord does not need to be VAT-registered to benefit.
- Confusing the 2-year empty rule with the 10-year rule. The 2-year rule (section 8) drops the works to 5% for a dwelling still, in law, residential. The 10-year rule, or a genuinely non-residential building, is different: it lets the first sale or long lease be zero-rated (section 5), which is what lets a developer recover the VAT.
- Forgetting the change-in-number-of-dwellings route. Splitting a house into flats, or knocking flats together into a house, is a residential conversion under section 7 of Notice 708. It attracts the 5% rate whether or not the property was previously empty. Landlords doing genuine reconfiguration often miss this.
- Applying option to tax to residential. Option to tax does not work on residential dwellings. VAT Notice 742A is explicit: an option to tax has no effect on a supply of a building designed or adapted for use as a dwelling. Trying this route to recover input tax on residential renovation is a dead end.
- Treating the zero rate as if it applied to the building work. On a non-residential conversion the works are reduced-rated at 5% (section 7); it is the developer's first sale or long lease that is zero-rated (section 5). The two reliefs stack, but they are not the same relief, and only the second one unlocks recovery.
Why classic VAT reclaim does not work on residential letting
The starting point is Group 1 of Schedule 9 to the VAT Act 1994, which lists the grant of interests in land as exempt. Residential letting sits squarely in this exemption. And unlike commercial property, residential dwellings cannot be brought into the VAT system by an option to tax: paragraph 2(2) of Schedule 10 to the VAT Act 1994 disapplies the option for buildings designed or adapted for use as a dwelling.
The practical consequence is direct. A landlord who spends £30,000 on a renovation (£25,000 net + £5,000 VAT) cannot register for VAT to reclaim the £5,000. Even if the landlord is already registered for another business activity, the residential letting portion produces exempt income, so any input tax attributed to it under partial exemption rules is irrecoverable. This is not a loophole to solve; it is the settled law.
Where the property is used for a taxable purpose (furnished holiday letting standard-rated as accommodation under Notice 709/3, or a genuine business use like a serviced apartment), the input tax position changes. In practice, though, most conventional buy-to-let renovations are stuck with the 20% at cost.
The 5% reduced rate: when the builder charges less
What the framework does offer is a lower rate at source. Under sections 7 and 8 of VAT Notice 708 (backed by Schedule 7A Groups 6 and 7 to the VAT Act 1994), a VAT-registered builder should charge 5% instead of 20% on qualifying residential works. The landlord is not the person claiming: the builder is the person charging correctly. But the effect on the landlord's bill is the same as a saving.
Three scenarios most commonly qualify:
- Empty home renovation (section 8): the dwelling has not been lived in for the two years immediately before the works start. HMRC's manual VCONST07420 is clear that "not lived in" is measured from the last date of residential occupation, not from a formal notice of vacancy. Storage or non-residential use during the two years does not break the empty-home condition.
- Changed-number-of-dwellings conversion (section 7): a house becoming two flats, or several bedsits becoming a single house. The reduced rate applies whether or not the property was previously empty.
- Non-residential conversion (section 7): a barn, a chapel, an office, a warehouse turned into a dwelling. The reduced rate covers the labour and eligible building materials.
The saving is meaningful. On a £100,000 net contract, 20% VAT is £20,000, while 5% is £5,000. That £15,000 goes straight to the landlord's balance sheet with no VAT return involved. The catch is that the builder must be VAT-registered, must understand the rules, and must be willing to charge at 5% rather than default to 20% out of caution. Local authorities in England and Wales will often provide a letter confirming a property has been empty for the required period; that letter is normally enough evidence for the builder to safely charge 5%.
The exception that flips the answer: convert, then sell
Everything above assumes the property stays residential. The moment it does not, a far more generous regime opens up, and it is the one that truly lets you recover VAT. If you convert a non-residential building into a dwelling and then sell it or grant a long lease, that first sale or lease is zero-rated under section 5 of Notice 708 (Group 5 of Schedule 8 to the VAT Act 1994). A zero-rated supply is still a taxable supply, so the input VAT on the conversion becomes recoverable in the normal way. That is the real split running through this article: exempt letting blocks recovery, a zero-rated sale unlocks it.
Two things need to stay straight, because the most common mix-up on this topic lives right here. The conversion works are reduced-rated at 5% (section 7), charged to you by the builder. The onward sale or long lease is zero-rated (section 5), made by you to your buyer. The two reliefs sit on top of each other: you pay 5% on the build, and you recover it because your onward supply is taxable. The zero rate attaches to the disposal, never to the building work itself.
The two situations that count as a non-residential conversion
Section 5 opens in exactly two cases. Both are worth knowing, because the second one is the one people miss:
- A genuinely non-residential building. Something never used as a home or for a relevant residential purpose: an office, a warehouse, a shop, an agricultural barn, a redundant school or church. Convert it into a dwelling and the first sale or long lease is zero-rated.
- The 10-year rule. A building that once was residential but has not been lived in during the 10 years immediately before your sale or long lease. The law then treats it as non-residential, and the same zero rate applies. A house left empty for a decade, converted and sold, sits here.
For the 10-year case, the evidence matters as much as the rule. Council Tax and electoral roll records, letters from utility companies, or a letter from the local authority's Empty Property Officer will all serve, and an Empty Property Officer's letter is on its own enough. When you work out the last date the property was lived in, you can ignore illegal occupation by squatters, property guardians placed there to deter vandals, and non-residential use such as business storage. Occasional living, though, a second home used now and then, breaks the empty condition and takes the zero rate away.
Grant a second lease on the same flat later, or sell it on, and that supply is exempt, not zero-rated. The recovery route is tied to the first grant only.
The conditions that come with the zero rate
The relief is generous but conditional. To zero-rate the sale or long lease you need to grant a major interest (a freehold sale, or a lease over 21 years in England, Wales and Northern Ireland); you must have person converting status, meaning you carried out or commissioned the conversion; and it must be your first grant, since any later sale or lease falls back to exempt. A conversion into a holiday home is excluded. Where the building will be used for a relevant residential purpose, such as a care home or student accommodation, you will need a certificate from the end user. One further point for developers: even on a zero-rated sale, VAT on goods that are not building materials, like many fitted appliances and furniture, stays blocked under section 12 of the notice.
The DIY Housebuilders Scheme: an owner-occupier route
For owner-occupiers, the DIY Housebuilders Scheme is a separate refund mechanism. It sits outside the normal VAT return process and lets an individual reclaim VAT on the construction or conversion of a home they will live in themselves, provided certain conditions are met.
The scheme covers two situations:
- New builds intended for the applicant's own use as a dwelling. The zero-rating rules that a professional developer would enjoy on a new dwelling are, in effect, extended to the self-builder through this refund route.
- Non-residential conversions intended for the applicant's own use (barns, offices, buildings that have not been used as a dwelling in the ten years before the works). Here the builder should have charged 5% under section 7 of Notice 708, and the applicant claims the 5% back through the scheme.
A claim is made after the works are complete, using form VAT431NB (new build) or VAT431C (conversion). It must be submitted within six months of completion. Only one claim is allowed per project. Materials that are not "building materials" as defined in Notice 708 (like fitted electrical appliances, fitted furniture beyond kitchen units, and certain external items) are excluded. In practice, we see the biggest DIY scheme claim errors on the materials side: excluded goods slip in, or the six-month deadline creeps up during the snagging phase.
Not sure whether your renovation qualifies for the 5% rate or how to evidence the empty-home condition? Our VAT Expert Call walks through it.
The routine repairs and refurbishment stay at 20%
If none of the three qualifying scenarios applies, the works are standard-rated at 20%. A landlord repainting between tenants, replacing a kitchen, updating a bathroom, fitting a new boiler, or generally improving an occupied dwelling pays 20% VAT and has no route to reclaim it. Notice 708 is explicit about the boundary: routine maintenance and improvements to a dwelling that is still in residential use are not within the reduced-rate framework.
Two nuances soften this in narrow situations:
- Energy-saving materials (insulation, solar panels, heat pumps, certain heating measures) can be zero-rated when installed in residential accommodation until 31 March 2027, then 5% afterwards, under Notice 708/6. This is a separate regime and does not require the empty-home condition.
- Approved alterations to a listed dwelling used to be zero-rated but were brought to standard rate on 1 October 2012. Anyone still relying on the pre-2012 zero rate on a listed dwelling is applying a rule that no longer exists.
For most landlord renovation projects, the working assumption should be 20%, with the two conversations to have with the builder being: does the property meet the empty-home condition? and does the work count as a change in the number of dwellings?
When you might need expert VAT advisory
The framework is clean on paper but the projects worth spending advisory time on are the ones sitting on the boundaries. In practice, the situations below are where a senior specialist's read meaningfully improves the outcome:
- Your renovation project has mixed elements (some works qualify for 5%, some do not) and you want a clear breakdown before the builder's quote comes back
- You're converting a non-residential building to residential and want to make sure the works qualify for the reduced rate at source, and that the DIY Housebuilders claim is set up correctly if you'll occupy the property
- The property is a mixed-use building (shop with flat above, commercial with residential upper floors) and you need to allocate the works and VAT position correctly across the two elements
- You are considering furnished holiday letting as an alternative to standard buy-to-let, and want the VAT and reclaim implications modelled before committing
Whether you're a business owner or an accountant working on a client case, we focus on the VAT questions where extra expertise pays off, and we work in plain English.