VAT rules in construction are complex and it’s vital that building and construction companies are aware of the VAT liability of their supplies, and any associated VAT reclaim criteria on costs. From zero rated VAT to the Domestic Reverse Charge, it’s important to understand what rules apply when for specific projects.
Failing to accurately identify the VAT treatment of supplies (both income and expenses) can result in underpaying or overpaying VAT, and inevitably, HMRC penalties.
While we would always recommend taking specific advice for any particular project, below is a general summary of the different VAT rules that apply in relation to new builds and work on pre-existing buildings.
VAT on the construction of ‘New Builds’
Construction of commercial buildings
Other than some types of residential or charity-related buildings (which may qualify for a lower VAT rate, subject to criteria), most types of construction works on new commercial buildings will be subject to VAT at the standard rate of 20%. This assumes the contractor is VAT-registered, which is compulsory when the value of their VAT-tax supplies is greater than £90,000 per year, although voluntary VAT registration is also possible for contractors/businesses with a turnover below this figure.
Construction of new homes
0% VAT (zero rate) can apply to works directly related to the construction of new build residential dwellings. This can offer a cashflow saving for any VAT-registered customers entitled to reclaim any VAT charged, and a significant actual cost saving for customers who are not VAT-registered, or those that are not entitled to reclaim all of the VAT charged to them.
However, detailed criteria must be met to enable zero-rate VAT to apply. This includes that the new dwelling must be:
• self-contained and can be used independently
• be possible to be sold on its own
• constructed in accordance with planning permission
• and it must usually be built from scratch on bare empty land (or where existing buildings were demolished to ground level) - although some limited other types of builds, e.g. adjoining existing buildings, may qualify, subject to further conditions.
That said, there are some exceptions to the criteria that may allow some constructions to qualify or prevent others from qualifying, and we would always recommend taking advice if assurance on a specific build project is required.
Construction of charity buildings
Construction works in relation to new buildings for registered charities may qualify for VAT zero-rating in some cases. To do this, the charity must issue a certificate to the supplier confirming its consistent use of the building will be one or both of the following:
1) Otherwise than in the course or furtherance of business i.e. non-business use. (Business activity for VAT purposes usually involves making supplies in return for consideration/payment, and therefore, many charitable activities will be considered to undertake “business” activity for VAT purposes, even if not profit-generating).
and/or
1) As a village hall or providing social or recreational facilities for a local community. This often involves being operated on a ‘not for business’ or ‘not for profit’ basis, with nominal profits put back into facilities of the village hall or the local community; used for social or recreational activities; used in a multi-purpose manner by a number of types of community groups and hired out on a first come, first serve basis
To be eligible, the construction must relate to a new building, not an extension, and this has led to some interesting VAT cases looking at whether a construction linked with an existing building is an “annexe” or an “extension”, where an extension would not qualify, whilst an annexe might subject to strict criteria.
VAT on pre-existing buildings works
Construction work on existing buildings is generally subject to the standard rate of VAT (20%) where the supplier is VAT-registered, though there are some specific exceptions which may qualify for the reduced rate of VAT (5%) or zero-rating (subject to satisfying detailed conditions). These include:
• Renovation work to empty residential dwellings that have not been lived in for at least two years
• The installation of qualifying energy saving materials, such as solar panels, insulation and ground and air source heat pumps
• For individuals who are chronically sick or disabled, where qualifying alterations are made to their home (building a ramp or widening a doorway or passage)
• Changing the number of dwellings, such as converting a house into flats or multiple flats into a house.
Historically, some works to listed buildings also previously qualified for a lower rate of VAT, however, this rule has now largely been abolished and most works in relation to listed buildings will not qualify for a lower rate of VAT due to their listed status alone.
VAT reclaim – “builders block”
VAT-registered contractors and suppliers can usually reclaim Input VAT on costs linked to taxable supplies, provided they hold valid VAT invoices. However, the “builders block” rule restricts VAT reclaim (for some developers and others) on some costs that are ‘incorporated’ in the building or its site – carpets, fitted furniture and built in appliances – which would not be zero-rated if a VAT-registered builder constructs a building from scratch. Property developers are recommended to review the relevant rules carefully in relation to all VAT reclaims, given the restrictions involved.
Construction Industry Reverse Charge
In 2021, the Construction Industry Domestic Reverse Charge was introduced. This shifted responsibility for accounting for VAT from the supplier to the VAT-registered customer – and at the same time created a significant risk area where it is not properly implemented!
Part of the reason behind the change was HMRC’s concern that some subcontractors were not remitting all of the VAT they collected from their contractor customers.
What this means, is that subcontractors will often now not be entitled to charge VAT, and instead, the contractor accounts for VAT on their own VAT return, and which they may be entitled to reclaim (effectively netting off to nil payable/claimable), subject to their own VAT position and usage of the services.
The Domestic Reverse Charge (DRC) applies where at least part of the supply falls within the scope of the Construction Industry Scheme (CIS) for tax purposes, and where the customer is not the end-user, but instead is a VAT-registered business making onward supplies to the their own customer further down the supply chain.
Applying the DRC isn’t always straightforward and there are invoicing considerations, so professional advice is recommended if a business is looking for assurance on how the DRC will affect a specific transaction or supply.
Avoid the risks of complex VAT rules
VAT can be complicated for any business, but it’s particularly complex for those in the construction industry, and the large amounts involved in many construction-related activities further increase the risk if the VAT treatment is incorrect.
For VAT advice, please call 0808 144 5575 or email help@armstrongwatson.co.uk
