This can be a complex area, and this is only a very small introduction to the subject. As VAT rules change relatively frequently, HMRC is the place to get your most accurate and up-to-date information. However, at the time of writing in the autumn of 2019 the following VAT rates are applicable.
Standard rate of 20% is applied to the supply and construction of building materials for extensions, renovations and partial rebuilding of homes. However, if you are creating a new dwelling, then this can be reduced down to either 0% or 5% depending on specific details of the project. This can offer huge savings, and may well influence the decisions made during early design work. Generic building cost advice is a dangerous subject as there are so many factors that influence build cost. Working within the confines of an existing building is more fiddly, but is not governed so strictly when it comes to thermal performance, air tightness etc. That said, a substantial amount of financial risk or unknowns can be eliminated once a new-build is out of the ground, which can make it closer to even costs. I have written another post around the subject of what it costs to build an extension.
For example if you have an existing old house that is being ‘knocked about’ and gutted as part of a major rebuild/remodelling, then this will be VAT rated at 20%. However, if it demolished fully down to ground level, and rebuilt then the new dwelling will attract 0% which may well be a greater saving than the demolition and rebuild costs if it is a significant project.
It is a shame that the government don’t take the environmental burden of throwing away existing building materials and their embodied energy seriously. The possibility of a 20% cost saving means more buildings get knocked down than strictly necessary. If the planners insist on retaining a historic facade, then in some cases the 0% applies but this has to be conditional to the approval, rather than optional.
If you convert an existing non-residential building, say an office, or barn or such then, as you are creating a dwelling from scratch, only 5% VAT is due. The same 5% applies to empty dwellings that have been vacant for 2yrs or more if they are renewed. Equally, if the type or number of residential units changes in a building then the 5% VAT may be applicable.
There used to be a reduced rate for alterations to Listed Buildings, but this has been removed. Although a reduced rate for repairs to Listed Buildings should be available (to balance the maintenance burden for the ongoing protection of the Nationally preserved building and the criminal offence of not doing so!) unfortunately it is the standard 20% that applies.
The HMRC VAT guidance note is very informative and the first place to begin looking into this subject. A quantity surveyor or your builder will also know how to make the correct claims. The link below will redirect you to the document.