The VAT implications on barn conversions and new builds

Converting agricultural buildings for residential use or constructing new dwellings to rent out on assured short hold tenancies (AST) or as furnished holiday lets (FHL) are options to utilise farm buildings and increase farm incomes.


The VAT position on building new residential properties and converting agricultural buildings into residential use can be complicated and it is important the invoices raised are appropriate for the work being done.


A builder carrying out the construction work will have three choices as to the rate of VAT to charge:

  • Zero rate - i.e. 0%
    • on the construction of new dwellings
  •  Reduced rate - i.e. 5%
    •  on qualifying conversions of non-residential dwellings into residential use
    •  residential property that has been unoccupied for more than two years
    •  where the number of dwellings in a property changes
  •  Standard rate - i.e. 20%
    •  on everything else


It is always important to check the planning permission granted in relation to the new build or conversion to ensure there are no clauses restricting the separate occupation or disposal of the property. If either of the following clauses are stipulated in the planning, then the construction work will not qualify for either zero rating or reduced rating:

  • if the property can only be used as ‘ancillary accommodation’ to another dwelling; or
  • the property can never be sold separately to another property.


Fortunately, an agricultural occupancy clause restricting occupation to someone currently or last working in agriculture should not create a VAT problem.


Whether the input VAT on the cost of the build or conversion can be recovered will depend if the dwelling is going to be lived in by yourself or a family member or on how the property is intended to be rented out; i.e. an AST or as a FHL.


If you or a family member is going to live in the dwelling the VAT can be reclaimed via a DIY self-build scheme.



Rental income from residential properties is an exempt supply for VAT purposes.


Input VAT can generally only be recovered where an entity is making a taxable supply (standard or zero-rated).


Renting out the properties on an AST would mean the business would become partially exempt, and consideration would need to be given to whether any of the input VAT on any repair costs were recoverable under the deminimis rules.


The basic rule is that input VAT on expenditure to generate exempt supplies cannot be recovered unless the total amount of exempt input VAT is below the partial exemption limits. Broadly, a VAT registered business can recover up to £2,500 of exempt input VAT in any one VAT year as long as the amount of the exempt input tax is less than the taxable input VAT for the business. If the exempt input tax incurred exceeds £2,500 in the VAT year, then none of it is recoverable.


Given this, where a property is going to give rise to exempt supplies it is particularly important to minimise the input VAT cost. However, any repairs would qualify as a full deduction for income tax purposes. Any improvements to the property would be capital expenditure and, unfortunately, will not qualify for income tax relief but may be utilised against any capital gain on sale.



FHL rental income is a standard rated supply for VAT purposes. If the property renovation was to be undertaken within the VAT registered farming business, all input VAT would be recoverable. As with the AST, repairs would be tax deductible and any improvements would be treated as capital expenditure, although capital allowances may be available on any furniture, white goods and integral features e.g. electrical installation.


The farming business would have to charge output VAT on the furnished holiday let income and this would be a cost to customers as they will be unable to recover the VAT.


If the FHL business was run separately to the farm partnership, then provided the new FHL business is not VAT registered and does not breach the annual VAT registration turnover threshold of £85,000, output VAT would not have to be charged to the customers, although no input VAT would be recoverable on the repairs and renovations.


The criteria for a property to qualify for FHL are strict and should be reviewed in detail before any investment is made or approved.


Contact Lentells Agricultural Divsion for more information.