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VAT FOR AN ANNEXE

Building an annexe, whether for a family member or as an investment, is an exciting project, but it also comes with its share of financial and legal considerations. One of the most significant factors for homeowners and developers in the UK is how VAT (Value Added Tax) applies to such projects. Navigating VAT rules can be complex, and understanding whether your project qualifies for reduced rates or exemptions could make a substantial difference in your budget. This blog aims to demystify VAT in the context of building annexes, breaking down the essentials in a way that’s clear, practical, and relevant for anyone embarking on this type of build.

Dealing with taxes at the best of times can be a daunting task, but when combined with things like Planning Permissions and Building Control, many people abandon the idea of building an Annexe at all. However, it doesn’t have to be complicated and in this blog I am going to attempt to break down the process and alleviate concern.

General Rule

Most people that work in the construction industry are aware that new builds are zero VAT rated, meaning that the end user (client/building owner) does not pay VAT on the plant, labour and materials used to build his/her new home. However, for a building to be considered “new” it must meet certain criteria.

What Counts as New

For work to be zero-rated for VAT, it must qualify as a genuinely new, self-contained house or flat. This means:

  • it’s self-contained – there are not any internal doors or connections to other houses or flats
  • it can be used independently of any other property, including businesses
  • it can be sold on its own
  • it has proper planning permission
  • any existing buildings on the site have been demolished completely to ground level (unless you’re extending an existing building to create a new house or flat)
  • Therefore, a “granny flat” or annexe that you’re building as an addition to an existing house cannot be sold separately to the main house, does not qualify as “new” and works must be charged at the standard VAT rate of 20%.
What this Means in Real Money

VAT can have a significant financial impact on your annexe build. For example, on a project costing £100,000, paying the standard 20% VAT rate would add £20,000 to your bill. However, qualifying for a reduced 5% rate would bring that VAT cost down to £5,000 – a £15,000 saving.

Carefully planning your project with VAT in mind can make a real difference to your overall budget. It’s worth investing time upfront to explore whether your annexe qualifies for any reductions or exemptions, as this can lead to considerable cost savings in the long run.

When that General Rule Changes

As with some rules, there are some exceptions. The most interesting of these exceptions is found in VAT Notice 701/20. This notice determines that zero VAT applies to any caravan that exceeds either 7 metres in length or 2.55 metres in width and it is manufactured to a version of BS3632. The obvious question for this reader is, “what has a caravan got to do with my desire to build an Annexe”, but the answer is that, my company has the knowhow to build an Annexe in such a way that it qualifies as such.

Let me explain

Whilst the government does not define what a caravan is, it does rely on the definitions within the Caravan Sites and Control of Development Act 1960 and the Caravans Sites Act 1968 to determine just what is. Within these acts the following guidelines are given.

A caravan is a structure that:

  • is designed or adapted for human habitation
  • when assembled, is physically capable of being moved from one place to another (whether by being towed or by being transported on a motor vehicle so designed or adapted)
  • is no more than:
    • 20 metres long (exclusive of any drawbar)
    • 6.8 metres wide
    • 3.05 metres high (measured internally from the floor at the lowest level to the ceiling at the highest level)

A ‘twin unit’ caravan can fall within this definition if composed of no more than 2 sections designed to be assembled on site by means of bolts, clamps and other devices, as long as, once assembled, it’s physically capable of being moved from one place to another.

Through years of experience, and extensive case law knowledge, the team here at ANX have mastered how to design and build your Annexe to ensure it stays within these parameters when required to do so. We can build our units in two sections and assemble on site which means that we can demonstrate their capability to be transported, and as you can see from the maximum dimensions given above, when put together these units can give ample living space.

This gives great flexibility to our clients who have more constringent planning constraints, or those who simply wish to build at zero VAT.

If the purpose of the proposed Annexe is to provide a home for a disabled person, then this work would also be considered zero VAT rated. Under the guidelines, someone who is “disabled” is someone with a:

  • physical or mental impairment that has a major long-term effect on their ability to do everyday activities
  • condition that the medical profession treats as a chronic sickness (eg diabetes)
  • terminal illness

The construction of a building intended for use solely for a relevant charitable purpose is zero-rated, with additions to an existing building normally being standard-rated. But the addition (or where only part of the addition is being used solely for a relevant charitable purpose, that part) can be zero-rated when all the following conditions are met:

  • An ‘annexe’ is constructed, rather than an ‘extension’ or ‘enlargement’ (read paragraph 3.2.7).
  • The annexe (or a part of it) is intended for use solely for a ‘relevant charitable purpose’ (read paragraph 3.2.8).
  • The annexe is capable of functioning independently from the existing building (read paragraph 3.2.8).
  • The annexe and the existing building each has its own independent main access (read paragraph 3.2.9).
  • Conditions 2 to 4 of paragraph 3.1.2 are met.

The demolition and reconstruction of an annexe to an existing building can be zero-rated subject to the conditions being met.

In conclusion, while the process of building an annexe and understanding how VAT applies can initially seem complex, it doesn’t have to be a deterrent. By taking the time to understand the rules around VAT, homeowners and developers can identify opportunities for savings, whether through qualifying for a reduced rate or exploring unique approaches like designing an annexe as a caravan. The potential financial impact is significant, with VAT rates influencing the overall budget of a project by thousands of pounds. However, with careful planning and professional guidance, it is possible to navigate the nuances of VAT and make the most of available options. Whether your annexe project is intended to support a family member, provide a space for charitable use, or serve as a new investment, understanding these key factors can help you make informed decisions and bring your vision to life in a cost-effective way.

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