Office to residential conversions – are you getting the VAT right?

6 April 2022 / Insight posted in Article

The number of offices being converted into residential properties, and therefore changing the property’s class, is at an all-time high – and this is only likely to increase with the rise in hybrid working since the pandemic. But are the correct levels of VAT being applied?

Depending on the development type, VAT can be charged at 20%, 5% or 0% for construction costs, so it’s important to ensure VAT is charged at the correct rate. The link between the work being subject to VAT rate of 5% or 0% and the planning rules is often overlooked, resulting in the wrong VAT rate being charged, paid and recovered.

A total of 72,980 new dwellings were added to the housing stock through Permitted Development Regulations (PDRs) from 2015 to 2020 – and 89% of these were office to residential conversions.* As we recover from the impact of COVID and our use of commercial sites becomes more defined, there are an increasing number of opportunities for permitted development for conversions of commercial property to residential property.

For any construction work to be subject to VAT at 0% or 5%, the work must be done in accordance with planning consent, and HMRC inspectors will routinely review planning portals. The advent of permitted development rules posed a problem, by allowing significant developments to take place without formal planning permission. This meant VAT would be charged at 20% on any construction work, regardless of the nature of the project.

If a developer hasn’t got all of their planning consent paperwork in order before works started, they can of course apply for retrospective planning documents. However, even if granted, such documents will not allow any work which has already taken place to be subject to VAT at 0% or 5%. This is because the only documents which matter, when considering the VAT treatment of construction work, are those in existence when the work is done.

At Moore Kingston Smith we can identify whether your development project is eligible for VAT relief, ensure you have the right tools to claim and plan for your future projects including cashflow forecasting. Get it touch if you would like to discuss this with one of our real estate and construction experts.


*Figures taken from Planning in England: permitted development and change of use.