VAT on London Home Renovations and Extensions: What Rate Applies?

Construction works on UK residential property are subject to one of three VAT rates depending on the type of work and the status of the building: Standard rate (20%): the default rate that applies to most construction services on existing dwellings — extensions, renovations, refurbishments, repairs, and improvements to a house or flat that has been in residential use. A London rear extension, a loft conversion, a bathroom refurbishment, a new kitchen — all are standard-rated at 20% unless a specific relief applies. Reduced rate (5%): a reduced VAT rate applies to certain types of work defined in Schedule 7A of the Value Added Tax Act 1994 (VATA 1994) and the VAT Act 1994 (Reduced Rate Supplies) Order 1995. The main categories of 5% reduced rate work relevant to London homeowners are: conversion of a non-residential building to residential use (for example, converting a former office, shop, or warehouse into flats or a house); residential conversions that change the number of dwellings (for example, converting a house into flats, or merging two flats into one house); renovation or alteration of a dwelling that has been empty for at least 2 years (the empty home rule); and certain energy-saving materials installed in residential dwellings (see below). Zero rate (0%): construction of a new dwelling (a new house or flat that has never previously been used as a dwelling) is zero-rated for VAT. The first grant of a major interest (freehold sale or long leasehold) in a new dwelling by the developer is also zero-rated. Materials supplied by the contractor as part of zero-rated construction works are also zero-rated. Most London homeowners undertaking extensions are not building new dwellings — they are extending or improving existing dwellings — so the zero-rate typically does not apply to the main residential extension works.

The 5% reduced rate is a significant tax saving — on a £100,000 contract it reduces the VAT from £20,000 to £5,000, saving £15,000. The main qualifying categories for London homeowners: Empty homes (empty for at least 2 years): if a dwelling has been empty for at least 2 years before the renovation commences, the renovation and alteration of that dwelling is eligible for the 5% reduced rate. The contractor must obtain evidence that the dwelling has been empty for at least 2 years before applying the reduced rate. Evidence types accepted by HMRC: Council Tax records showing the property has been unoccupied and exempt from Council Tax for at least 2 years; electoral register records showing no residents; local authority housing authority records; evidence from the energy supplier (no or minimal energy use for 2 years). In practice: if you are buying and renovating a long-empty property in London, check the empty home status at the outset and obtain the required evidence before the contractor starts work. Conversion of a non-residential building to residential use: if a building that has never been used as a dwelling (or that has been used for a non-residential purpose for the past 10 years) is being converted to residential use, the conversion works are eligible for the 5% reduced rate. Examples relevant to London: a former retail unit being converted to a flat; a former office building being converted to apartments; a disused industrial building being converted to a live-work unit. Change in the number of dwellings: if the works convert a building to create a different number of dwellings than currently exist, the 5% rate may apply. Examples: converting a single large house into flats (increasing the number of dwellings); merging two flats into a single dwelling (decreasing the number). The partial 5% rate applies only to the qualifying elements of the works — if the project includes both qualifying conversion works (5%) and non-qualifying improvement works (20%), the contractor must apportion the VAT charge correctly.

The Spring Budget 2022 and the subsequent Energy-Saving Materials Order introduced a temporary zero-rate for the installation of qualifying energy-saving materials in residential dwellings. This temporary zero-rate was made permanent in the Autumn Statement 2022 — effective from February 2024. The zero-rate applies to the installation (labour and materials) of the following qualifying energy-saving materials in an existing dwelling: Solar panels (PV and solar thermal): zero-rated for supply and installation. Heat pumps (air source and ground source heat pumps): zero-rated for supply and installation. Insulation (loft insulation, cavity wall insulation, solid wall insulation, floor insulation, draught proofing): zero-rated for supply and installation. Heating controls (including smart heating controls, thermostats, and controls for heat pumps and solar systems): zero-rated for supply and installation. Mechanical ventilation with heat recovery (MVHR): zero-rated for supply and installation. The zero-rate applies to the installation as a whole (both the materials and the labour element) — the contractor must not split-charge the labour at 20% and the materials at 0%. This zero-rate is significant for London homeowners undertaking energy upgrades alongside an extension or renovation — particularly heat pump installation, solar PV, and external or internal wall insulation as part of a Passivhaus or EnerPHit upgrade. Note: the zero-rate applies to qualifying energy-saving materials installed in an existing dwelling. It does not extend to general building works that may contribute to improved energy efficiency (such as new windows or doors, unless those windows and doors are specifically draught-proofing items). New windows and external doors are standard-rated at 20%.

Understanding how a correctly VAT-registered London contractor should charge VAT on a mixed project (one that includes both standard-rated and potentially reduced-rate or zero-rated elements) is important for the homeowner's financial planning. A VAT-registered contractor must: Determine the correct VAT rate for each element of the works: for example, a London rear extension on an existing occupied dwelling is standard-rated (20%); the installation of a heat pump as part of the same project is zero-rated (0%) on the heat pump supply and installation. Issue a VAT invoice that clearly shows the VAT rate applied to each element and the total VAT charged. For a mixed project, the invoice should show separate line items for: standard-rated works (20% VAT); zero-rated works (0% VAT); and reduced-rate works (5% VAT) if applicable. The homeowner can request a copy of the VAT invoice for their own records — this is important if the homeowner is VAT-registered and intends to reclaim input VAT. VAT threshold: a contractor does not have to charge VAT on their works if their annual turnover is below the VAT registration threshold (£85,000 as of 2025). Small sole trader builders working below the threshold do not charge VAT — this is entirely legitimate. However, a contractor who should be VAT-registered but is not (because their turnover exceeds the threshold) is trading illegally, and the homeowner may have no VAT invoice to provide evidence of the transaction. Always obtain a VAT invoice from any contractor who charges VAT, and check that the VAT registration number shown on the invoice is valid (verify at the HMRC VAT number checker at tax.service.gov.uk/check-vat-number). The reverse charge: since March 2021, the Construction Industry Scheme (CIS) domestic reverse charge applies to VAT-registered sub-contractors supplying services to VAT-registered main contractors. Under the reverse charge, the sub-contractor does NOT charge VAT to the main contractor — the main contractor accounts for the VAT directly to HMRC. This mechanism does not affect the homeowner directly (it applies in the supply chain between contractors), but it affects the invoicing structure of VAT-registered subcontractors and may cause confusion if sub-contractors' invoices are shared with the homeowner.