Last edited 15 Jul 2019

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Construction VAT

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[edit] Introduction

Value Added Tax (VAT) is a tax added to the cost of certain goods and services. It is only accountable where the party raising an invoice is VAT registered. It is necessary to register if VAT-able turnover exceeds a minimum threshold in any 12-month period.

When VAT is added to a sales invoice it is 'output tax' in the hands of the party raising the invoice. To the recipient of the invoice the same tax is 'input tax'.

Supplies of certain goods may be 'exempt' or 'zero-rated'. In both of these categories VAT is not added to the value of the supply but there is differing treatment with regard to input tax incurred with regard to making that supply.

In the design and construction sectors most supplies are 'standard-rated' and therefore VAT is added to the value of supplies at the prevailing rate of VAT. But certain types of work can sometimes be charged at a reduced rate of 5 per cent, or at the zero rate (see the table below).

For a party wishing to undertake development of any sort it is vital that, in calculating the budget for the job, VAT is correctly accounted for:

If you run a VAT-registered construction business it is important to charge the right VAT rate. You can normally only charge the reduced or the zero rate if certain conditions are met. So if you think either rate applies, you should check the details to make sure.

The conditions can relate to different aspects of the work, including:

Zero-rating and reduced-rating work on ordinary domestic dwellings

TYPE OF WORK VAT RATE
Construction of a new house or flat zero
Converting a building into a house or flat reduced rate
Renovating or altering an empty house or flat reduced rate
Supplying and installing certain mobility aids for elderly people reduced rate
Supplying and installing certain energy saving materials and equipment reduced rate
Supplying and installing certain heating systems and security goods when funded by a grant reduced rate
Connecting or reconnecting to the mains gas supply - first time connections and grant-funded connections or reconnections Can sometimes be zero or reduced rate
Supplying or installing goods for a disabled person in their home zero
Making alterations to suit a disabled person zero
Converting a residential building into a different residential use - for example combining two cottages into a single house reduced rate

[Ref. HMRC: Work on ordinary homes that may be reduced-rated or zero-rated.]

Any construction work on an ordinary house or flat that isn't listed in the table above is always standard-rated at the current standard rate. This would include, for example:

[edit] Reverse charge

From October 2019, a domestic VAT reverse charge will come into effect to tackle fraud in the construction industry. A reverse charge enables a customer to charge themselves VAT rather than the supplier charging it. This removes any opportunity for the supplier not to pay HMRC (missing trader fraud). The reverse charge will apply to businesses that supply services to another business that will then sell on that service, but not those that supply services to consumers.

For more information see: VAT reverse charge.


This article was created by --Martincantor 11:28, 6 August 2012 (BST)

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Comments

Re: Construction of a new house or flat

I think it would be more accurate to say that "construction of most new houses and flats" is zero rated, as new separate self-contained dwellings can be liable to VAT if the terms of the planning permission prevent the separate disposal or separate use of the new dwelling. This is detailed in question 13 on tax form VAT431NB and its notes.

see https://www.gov.uk/government/publications/vat-refunds-for-diy-housebuilders-claim-form-for-new-houses-vat431nb