• Date

    11 Mar 2021
  • Category

    Tax, VAT & Indirect Tax

Building a farmhouse – tips on saving VAT

If you are constructing, converting or refurbishing a farmhouse make sure you confirm the VAT liability of the works you will undertake and the recovery of the VAT you incur at the planning stage.   

The standard-rate of VAT is currently 20% and this can be an unwelcome surprise if it isn’t factored into project costs by you or your contractor.  It is worth confirming whether the works could be liable to the zero or 5% rates of VAT and whether the VAT you incur can be claimed back from HMRC.   Here’s all you need to know about VAT and farmhouses:

In an ideal VAT-world you would not incur any irrecoverable VAT when you construct a farmhouse.  The lowest rate of VAT you can incur is zero.  This applies to the construction of ‘new’ dwellings.   The wording on your planning permission is important.  It should clearly state that you are constructing a new dwelling and it should not impose restrictions on use or disposal.  Zero-rating can still apply when planning permission requires you to retain a façade/wall from an existing building or where the new building joins an existing one.  You can also consider using the VAT DIY scheme to recover any VAT you do incur.

If your project doesn’t qualify for zero-rating, it could be liable to the reduced rate of VAT (currently 5%).  The reduced rate applies when you:

  • renovate an empty dwelling (one that has not been lived in for the last 2 years),
  • you change the number of dwellings in a building (e.g. 2 cottages to a single house or vice versa),
  • convert a steading (or any other non-residential building) into a dwelling.

In these situations, the 5% rate of VAT applies to conversion/renovation works and associated goods.  Once again, the VAT you incur may be recovered from HMRC using the VAT DIY scheme.

If you use the dwellings for business purposes (and you are VAT registered), you should be able to recover some (or all) of the VAT you incur.  VAT is recoverable if the dwelling is used as a main farmhouse, to provide accommodation to key employees or for holiday accommodation.  Conditions apply so be sure to double check the rules of VAT recovery.

It is widely believed that farmers can automatically recover 70% of the VAT they incur on farmhouse costs.  In reality it depends on the use of each farmhouse.  Recovery is possible when expenditure is directly linked to the farm’s business activities.  A maximum recovery of 70% is possible in situations where building works are solely linked to business activity.  Where there is an element of private/personal use a lower level of recovery can normally be agreed with HMRC. 

Before you do anything, get specialised VAT advice, confirm the VAT liability of the works and the recovery of any VAT you incur as early as possible.  At Azets we have a UK team of VAT specialists.  Contact us and allow us to help you minimise the cost of VAT on your project.

About the author

Alan Glen Photo

Alan Glen

Director of VAT Edinburgh
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