Overview of VAT on Construction Services
The default position for the VAT rating of construction services is that they are standard-rated (20%), but in some circumstances they can be zero-rated or reduced rated (5%). This factsheet gives an overview of those circumstances.
When can construction services be zero-rated?
The following types of construction work can be zero-rated:
· The construction of new dwellings and certain communal residential and charitable buildings (such as a building used by a charity for non-business purposes, or a village hall);
· The conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building;
· Alterations to suit the condition of people with disabilities; and
· First time gas and electricity connections.
For each of the above cases, there are specific rules concerning which services qualify for the zero-rating.
When can construction services be reduced-rated?
The following types of construction work can be reduced-rated:
· The conversion of a non-residential building into a qualifying dwelling or communal residential building;
· Conversions of residential buildings to a different residential use;
· The renovation or alteration of empty residential premises;
· The installation of energy saving materials, grant funded heating system measures and qualifying security goods; and
· The installation of mobility aids for the elderly for use in domestic accommodation.
For each of the above cases, there are specific rules concerning which services qualify for the reduced rate.
Who can apply the lower rates of VAT?
In most of the above circumstances, the ability to charge the lower rates of VAT applies to the main contractor and subcontractors, but in some cases the subcontractor must charge VAT at 20%. The most notable example of this is where work is carried out on a ‘certificated’ communal residential or charitable building.
What about materials?
Building materials that are supplied and incorporated in a building (or its site) are charged to VAT at the same rate as the work being carried out. Therefore, if the work is zero-rated or reduced-rated, then so are the building materials.
For these purposes, ‘building materials’ means those that are ordinarily incorporated into a building, excluding most electrical appliances, carpets and furniture that is not kitchen units.
The VAT Domestic Reverse Charge
When construction services are subject to VAT at either 5% or 20%, it is likely that the supplier will need to apply the domestic reverse charge to the invoice. In short, this means that the customer accounts for and pays any VAT due on the supply.
Further information
The VAT-rating of construction services is a wide-ranging, complex topic and this factsheet is intended as an overview – if you have any questions, please get in touch with us!
HMRC guidance on VAT on construction services can be found here: https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708
HMRC guidance on the VAT domestic reverse charge can be found here: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#contents
