Can I Reclaim VAT on Property Development Costs

This guide explains when VAT can be reclaimed on property development costs including new builds, conversions, commercial projects, and buy to let developments.

VAT on property development is one of the most complex areas of the UK tax system. Whether you can reclaim VAT depends on the type of project, whether you are VAT registered, how the building will be used, whether it is commercial or residential, and whether the project qualifies for zero rating or reduced rating. Many developers waste thousands in unreclaimed VAT because they misunderstand the rules while others make incorrect claims that HMRC later challenges.

In my opinion reclaiming VAT correctly can make or break the profitability of a development project. The rules are strict but clear once you understand the structure. This guide explains when you can reclaim VAT, when you cannot, how the rules differ for new builds, conversions, commercial developments, and buy to let properties, and what evidence you must keep to support your claims.

The First Question: Are You VAT Registered

You can only reclaim VAT on development costs if you are VAT registered.

This means:

  • If you are a developer or company registered for VAT and you charge VAT on your supplies you can usually reclaim VAT on your costs.

  • If you are not VAT registered you cannot reclaim VAT unless using a specific scheme such as DIY housebuilding.

If you plan to reclaim VAT you must register before you start making taxable supplies. In some cases voluntary registration is useful even when turnover is below the VAT threshold.

The Second Question: What Type of Property Project Is It

Whether VAT is reclaimable depends heavily on the type of development.

The main categories are:

  1. New build residential properties

  2. Residential conversions

  3. Commercial property developments

  4. Mixed use developments

  5. Buy to let residential developments

  6. Renovations to existing dwellings

  7. DIY housebuilding projects

Each one follows different rules.

1. New Build Residential Properties (Zero Rated)

The construction of a brand new dwelling is zero rated for VAT when certain conditions are met.

This means:

  • Builders charge VAT at 0 percent

  • You do not pay VAT on most construction work

  • You can reclaim VAT on standard rated costs that do not qualify for zero rating such as architect fees, professional fees, some materials, and equipment hire

A new build must:

  • Be a completely new dwelling

  • Have its own entrance

  • Have its own facilities (sleeping, washing, cooking)

  • Be capable of separate use

  • Not be connected internally to another existing dwelling

Can you reclaim VAT

Yes.
If you are VAT registered you can reclaim VAT on eligible costs.
If you are not VAT registered you may still reclaim VAT through the DIY housebuilding scheme.

In my opinion this is the simplest area of property VAT.

2. Residential Conversions (Reduced Rate)

Conversions often qualify for the 5 percent reduced VAT rate.

This applies when you:

  • Convert a non residential property into a dwelling

  • Convert a property that has not been used as a dwelling for at least 10 years

  • Convert a single dwelling into multiple dwellings

  • Convert multiple dwellings into one dwelling

  • Convert a commercial building into residential use

Can you reclaim VAT

If you are VAT registered yes.
You reclaim VAT on your inputs just like any other taxable supply.

If you are not VAT registered you cannot reclaim VAT unless it falls under the DIY scheme (only applicable in specific conversion cases).

3. Commercial Property Development (Standard Rated)

Most commercial property construction is standard rated.

This means builders charge 20 percent VAT.

Can you reclaim VAT

Yes, if:

  • You are VAT registered

  • The property will be used for a VATable business activity (for example an office you rent out with VAT elected through an option to tax)

If you develop commercial property for sale you will also charge VAT on the sale. This lets you reclaim VAT on your costs.

If you develop commercial property that is exempt from VAT you may face partial exemption rules which limit your VAT recovery.

4. Mixed Use Developments

Mixed use properties contain both residential and commercial elements. VAT becomes more complicated here.

Residential units are zero rated or reduced rated.
Commercial areas are standard rated.

Can you reclaim VAT

Yes but you must:

  • Apportion costs between residential and commercial parts

  • Apply partial exemption rules if any part of the project is exempt

You only reclaim VAT in proportion to the taxable and zero rated parts of the project.

In my opinion mixed use developments are the most challenging VAT category for small developers.

5. Buy to Let Residential Properties

This is the biggest area of confusion.

Residential letting is VAT exempt.

This means:

  • You do not charge VAT on rent

  • You cannot reclaim VAT on costs relating to an exempt supply

So can you reclaim VAT on buy to let development

Usually no.

Even if you register for VAT you cannot reclaim VAT because:

  • Your end use is exempt

  • Exempt supplies restrict recovery

The only exception is if you intend to sell the property not rent it.

If your intention is resale and the sale is zero rated or taxable then VAT can often be reclaimed. Intention matters so documentation is vital.

6. Renovations to Existing Dwellings

General renovation and repair work to residential property is usually standard rated.

Builders charge 20 percent unless:

  • The property has been empty for 2 years or more (then 5 percent rate may apply)

  • The work is part of a qualifying conversion

  • The property is a protected building with specific qualifications

Can you reclaim VAT

Only if:

  • You are VAT registered

  • You will make a taxable supply

  • The renovated property is intended for sale not rental

Renovating a buy to let is not recoverable.

7. DIY Housebuilding Scheme

If you build a new home or convert a property for yourself (not a business) you can reclaim VAT through the DIY Refund Scheme.

This includes:

  • New builds

  • Qualifying conversions

  • Some non residential to residential conversions

Key rules:

  • You must reclaim after the project completes

  • You must submit VAT invoices

  • You cannot reclaim services, only materials and certain labour

  • Claims must be within 3 months of completion

This scheme is for individuals, not companies.

Key VAT Concepts Developers Must Understand

1. Zero rated vs exempt

Zero rating allows VAT recovery.
Exemption blocks VAT recovery.

Many developers confuse these and lose claims.

2. Intention

VAT recovery depends on the intended use of the property.

  • If intention is sale you can usually reclaim.

  • If intention is letting you usually cannot.

If intention changes you may face a VAT adjustment.

3. Partial exemption

If a project includes both VATable and exempt supplies you must perform a partial exemption calculation to determine how much VAT you can reclaim.

4. Option to tax

Commercial landlords can elect to charge VAT on rent or sale which allows full VAT recovery on costs.

5. Apportionment

Mixed use projects require detailed cost apportionment between residential and commercial.

What Costs Can You Reclaim VAT On

You can usually reclaim VAT on:

  • Construction labour (if standard rated)

  • Materials

  • Architect fees

  • Surveyor fees

  • Planning consultant fees

  • Engineering fees

  • Professional advisors

  • Equipment hire

  • Site preparation

  • Utilities for construction use

  • Marketing and sale costs

You cannot reclaim VAT on:

  • Costs relating to exempt residential letting

  • Costs not supported by a VAT invoice

  • Wages (rather than contractor invoices)

  • Legal fees relating to exempt supplies

  • VAT incorrectly charged on zero rated work

Common Scenarios

Scenario 1: New build for sale

Developer sells new houses.
Sales are zero rated.
All input VAT recoverable.
Best case for VAT.

Scenario 2: New build kept as buy to let

Developer rents out new homes.
Letting is exempt.
VAT not recoverable.

Scenario 3: Conversion of office into flats

Work qualifies for 5 percent rate.
Developer sells flats.
Sales are zero rated.
VAT recoverable.

Scenario 4: Renovation of existing house for resale

VAT on costs recoverable if developer is VAT registered.
Sale is zero rated only in certain cases (first grant of major conversion).

Scenario 5: Renovation for rental

VAT cannot be reclaimed.

Scenario 6: Commercial unit development

VAT recoverable if option to tax is applied to rent or sale.

Evidence You Need To Reclaim VAT

HMRC expects:

  • VAT invoices in the correct name

  • Proof you are VAT registered

  • Proof of intention (business plans, funding applications, marketing material)

  • Apportionment calculations for mixed use

  • Partial exemption calculations

  • Properly kept records for five years

  • Bank statements showing payment

In my opinion correct VAT invoicing is the single most overlooked requirement.

If invoices are not addressed to the correct entity HMRC may deny the claim entirely.

Mistakes Developers Commonly Make

  • Assuming new builds are always exempt instead of zero rated

  • Claiming VAT on buy to lets

  • Not registering for VAT early enough

  • Using the wrong business entity

  • Letting intention shift from sale to rental without making adjustments

  • Failing partial exemption calculations

  • Failing to keep proper VAT invoices

  • Confusing reduced rate and zero rate

  • Not claiming within the correct period under the DIY scheme

Real UK Examples

Example 1: Developer reclaiming VAT on flats for sale

Emma converts a warehouse into 12 flats.
Work is at 5 percent.
Sales of flats are zero rated.
She reclaims all VAT on architect fees, materials, and professional services.

Example 2: Contractor building a buy to let portfolio

Tom renovates houses to rent them out.
VAT on materials and services cannot be reclaimed.

Example 3: Mixed use redevelopment

A building becomes a shop with flats above.
Developer must apportion costs.
VAT on commercial part recoverable.
VAT on residential part not recoverable.

Example 4: DIY new build

A couple self build a home.
They reclaim VAT on materials after completion through the DIY scheme.

Example 5: Office development

A commercial office is refurbished.
Option to tax applied.
VAT on the refurbishment is reclaimed.

Final Thoughts

Whether you can reclaim VAT on property development costs depends entirely on the type of project and the intended use of the property. If the development leads to a zero rated or standard rated sale you can usually reclaim VAT. If the development results in exempt residential letting you usually cannot. Mixed use projects and conversions require careful apportionment and sometimes partial exemption calculations.

In my opinion property developers should always seek VAT guidance at the planning stage because intention, structure, and VAT registration timing can dramatically impact profitability. With good planning you can reclaim the right amount of VAT and avoid costly HMRC disputes.