Is VAT chargeable on building works?
Whether your planned construction involves building a new property or renovating an existing one, you will have to consider the tax that’s potentially involved and what it means for you. It is always worth seeking advice from a specialist when embarking on a project.
VAT applicable on construction works comes in three varieties:
Standard Rate, currently set at 20%
Reduced Rate, currently set at 5%
Zero-rated, for which the consumer is charged 0%
There is a difference in rates charged on different types of building works and different buildings. So what does your construction work fall under?
Residential New Build works:
If you are building a brand-new house or flat, it will be zero-rated for VAT. This means your builder won’t charge you VAT on labour, machinery hire or the building materials. There are conditions for this though, the property must be self-contained, with no internal doors and connections to other houses or flats. It also must have had planning permission and can be sold independently. Note that certain non-fixed items such as the scaffold hire element of the works, carpets, curtains and white goods not ‘built in’ (loose fixed fridges etc.) may be subject to standard rate VAT.
Note that if you were building an annexe as an addition to an existing house, this would not be considered a new build and VAT will have to be charged at the standard rate. Similarly, if a building suffers a severe fire and is demolished and rebuilt off its retained original foundations the build may not be considered a new build by the VAT office and will be subject to standard rate VAT.
For renovations, the rate may be different in certain circumstances. Converting a residential property into another type of residential property, such as turning a house into flats, can be charged VAT at the reduced rate. The same rate of VAT may also apply to renovating a home that has been empty and not in use for at least 2 years prior to the works commencing. Without meeting these criteria, the standard rate of VAT would generally apply to renovation works.
Note that if you are installing goods or making alterations to a property to make it easier for a disabled person, for example adapting a bathroom to become a shower room for a disabled person’s needs, you may be able to qualify for VAT exemption.
Also, if you’re installing certain ‘green’ energy saving items into a property to improve energy efficiency, such as insulation, draught stripping, air source or ground source heat pumps and solar panels, the cost of that specific work may well qualify for reduced rate VAT.
Commercial Property:
Commercial properties in particular can be subject to much finer criterion when it comes to VAT.
As a general rule, any work, whether building from scratch or renovating / fitting out a commercial property, may be charged at the standard rate of VAT. A major exception to this rule would be if the property is being used for charitable purposes or a not for profit business.
However, if your company is VAT registered through the HMRC, the VAT can often be claimed back once the work is complete and most of your outlay should be recoverable.
Listed Buildings:
One of the myths within the arena of VAT and construction works is that Listed buildings are zero-rated. This was the case some years ago, but back in 2012 the Treasury changed the VAT on all authorised work to Listed buildings to the standard rate. Since then, it has been argued in the House of Commons that the rate should lowered to a reduced rate or zero, however, as it stands your contractor will charge you a standard rate of 20% VAT for any repairs, renovations or alterations to a Listed property unless it meets certain qualifying criteria.
The importance of ‘getting it right’:
VAT can be a significant addition to the cost of your building works. We highly recommend that before you embark on a project of any type, you get clear advice from an expert in VAT – most likely the best person to consult will be an expert accountant. Of course, by all means get in touch with your local VAT office to get clarity and put your mind at rest if required.
Do also note that the standard rate VAT applicable to professional fees are not affected by the type of work being carried out even if the project the professional is working on for you is a zero rated or reduced rate project.
For Government guidance, check out VAT Notice 708 via this link (click here)
Article written August 2020 – circumstances may change due to future government policies.