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If a supply is not zero-rated or exempt then by default it will be a standard rate (20%) supply. The main difference between zero-rated and exempt supplies is that a business registered for VAT may reclaim/recover all input tax incurred on a zero-rated supply but no VAT can be reclaimed on exempt supplies.

The one exception to this general rule is with regard to land and property. VAT at a reduced rate of 5% applies to the following types of renovation:

Conversions of non-residential building into a residential or charitable property.
Projects where the works refurbish a residential or charitable building that has been empty for two or more years.

Conversions that change the number of dwellings, e.g. the conversion of one house into flats and conversely, a block of flats back into a single dwelling.

‘Residential’ includes dwellings (regardless of size), and other residential buildings such as student accommodation. ‘Charitable purpose’ includes buildings used by charities for non-business purposes such as churches, schools, care homes and day centres.

A special VAT refund scheme allows do-it-yourself (DIY) builders and converters to also recover 5% of the VAT they incurred on construction and conversion costs. The timing of such claims is important as DIY house builders must ensure that claims are submitted within three months of completion of the project. Evidence is needed to support the claim.

Example:
In May 2013 Andrew purchased a residential bungalow that had not been lived in for a year, intending to convert the property into a house. Planning permission was delayed and not granted until December 2014. Andrew was working on another project at the time and the building work on the bungalow did not start until June 2015. The house was finished in September 2015.

The VAT charges are as follows:
Purchase of property: No VAT charge as an exempt supply.

Renovation work: As the property had not been lived in for two years or more when the work commenced, the VAT tax charge is 5%. Building materials and certain electrical goods supplied that are incorporated into the building will attract the 5% charge. However, building materials supplied in isolation attract the standard 20% VAT rate.

Sale of property: The sale will be exempt from VAT. Should the property have originally been empty for ten years then the VAT charge could be zero-rated.