VAT for Builders and Construction

Introduction

VAT in the construction industry can be complex, with different rates applying depending on the type of work you're doing. Most building work is charged at the standard rate of 20%, but there are important exceptions where you can charge 0% (zero-rated) or 5% (reduced rate), and you need to understand the domestic reverse charge rules that came into effect in March 2021.

Standard, Reduced and Zero-Rated Work

Standard Rate (20%)

Most construction work on houses, flats and other buildings is charged at the standard rate of 20% VAT. This includes:

• General repairs and maintenance
• Extensions and loft conversions
• Listed building alterations (from 1 October 2012)
• Residential caravan park development
• New buildings that don't meet the criteria for zero-rating

Zero-Rated Work (0%)

You don't charge VAT on certain types of construction work, meaning you charge 0% rather than 20%. This includes:

New dwellings and residential buildings: Building genuinely new, self-contained houses or flats. To qualify as zero-rated, the building must:

• Be self-contained with no internal doors or connections to other properties
• Be capable of independent use, separate from any other property or business
• Be capable of being sold on its own
• Have proper planning permission
• Involve complete demolition to ground level of any existing buildings (unless extending to create a new dwelling)

A 'granny flat' or annexe attached to an existing house cannot be zero-rated because it cannot be used or sold separately from the main house.

Work for disabled people: Alterations to a disabled person's home and certain equipment for their personal use. To qualify, the person must have:

• A physical or mental impairment with a major long-term effect on everyday activities
• A condition treated as chronic sickness (such as diabetes)
• A terminal illness

Someone who is temporarily disabled or elderly but not disabled does not qualify for zero-rating.

Zero-rated alterations for disabled people include:

• Building ramps
• Widening doorways or passages (but not building new ones)
• Installing, extending or adapting bathrooms, washrooms or lavatories
• Installing, repairing or maintaining lifts between floors
• Preparation and restoration of immediately surrounding décor

Zero-rated equipment includes adjustable beds, hoists, chair and stair lifts, sanitary devices, alarms, and parts for qualifying equipment.

Other zero-rated construction:

• Conversion of non-residential buildings into dwellings by housing associations
• Certain new buildings used by charities
• First-time gas and electricity connections

Reduced Rate (5%)

You charge 5% VAT on:

Residential conversions: Converting a non-residential building into a dwelling or changing a residential building to a different residential use (except when done by housing associations, which is zero-rated).

Renovating empty properties: Renovation or alteration of residential premises that have been empty.

Energy-saving materials: Installing qualifying energy-saving products, grant-funded heating system measures, and qualifying security goods in residential properties. The reduced rate applies to installation work and the materials when you supply and install them. If you only supply the products without installing them, you must charge the standard rate of 20%.

Mobility aids for over-60s: Installing certain mobility aids for people over 60 in residential properties. As with energy-saving products, this applies when you supply and install the aids.

Timing and What Counts as Building Materials

Work "In the Course of Construction"

Zero-rated work must take place during the construction project or be closely related to it. This includes demolishing existing buildings and preparing the site. You cannot zero-rate work done after a building is finished, except for correcting defects in the original work ('snagging').

Building Materials

All labour on a qualifying building can be zero-rated, but there are specific rules about what counts as building materials for VAT purposes. Not everything you supply will qualify as a building material under VAT law.

The Domestic Reverse Charge

From 1 March 2021, the VAT domestic reverse charge applies to certain supplies of building and construction services. This is a significant change affecting how VAT is accounted for on some transactions between VAT-registered businesses in the construction sector.

Under the reverse charge, the responsibility for accounting for VAT moves from the supplier to the customer. This means you may not charge VAT on your invoice in certain circumstances, and instead your customer accounts for the VAT directly to HMRC.

Retention Payments

Apply the same VAT rate to retention payments as you applied to previous payments under the contract. Retention payments follow the VAT treatment of the original work.

Certificates from Customers

For certain zero-rated or reduced-rate work, you need a certificate from your customer confirming the building will be used for a qualifying purpose. You're responsible for obtaining and keeping these certificates.

For work on disabled people's homes, you should obtain a signed declaration from the customer (or their parent, guardian, doctor or another responsible person) proving eligibility. This declaration must be separate from any order form or invoice.

Mixed-Use Buildings

When working on mixed-use buildings (such as a shop with a flat above), only the work on the residential part can be zero-rated. You must charge the appropriate rate for each element of the work.

Record Keeping

You're responsible for ensuring your customer is eligible for zero-rate or reduced-rate VAT, and you must be able to prove this from your records. Keep all certificates, declarations and supporting documentation.

Sources

• Buildings and construction (VAT Notice 708)
• VAT for builders
• Reliefs from VAT for disabled and older people (VAT Notice 701/7)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.