Your guide to VAT on Construction

All you need to know about VAT on construction

VAT on the supply of land and buildings (sale or rent) is generally an exempt supply meaning that the owner is not able to reclaim input VAT on any building works undertaken (which are generally standard rated).

Zero-rating VAT on construction

Providing the services are not specifically excluded from zero rating (i.e. architectural services) the services supplied in the course of construction on new buildings can be zero rated if the building:

• Is designed as a dwelling;
• Will be used solely for a relevant residential purpose; or
• Will be used solely for a relevant charitable purpose.

In order for a building to qualify as being ‘constructed’ it must be it must be designed as dwelling and be built from scratch.  Before construction commences any pre-existing building must be completely demolished to ground level, therefore a house that incorporates a part, or parts, of the existing dwelling will not qualify for zero-rating.

In determining whether a dwelling has been fully demolished, party walls that separate one building from another can be ignored.  It should be noted that if demolition is undertaken prior to the receipt of planning consent then it is not accepted as being ‘closely connected’ to the construction works and should be standard rated.

It should also be noted that, in order for zero-rating to apply, statutory planning consent must be obtained and the dwelling must be constructed in accordance with that consent.

Reduced-rating VAT on construction

The alteration or renovation of an existing property can qualify for the reduced rate if all of the following conditions are met:

• You renovate or alter ‘qualifying residential premises’ including a single household dwelling;
• The premises have been vacant for two years or more immediately prior to the commencement of construction;
• You hold a certificate if works are in relation to a ‘relevant residential purpose’; and
• Your services are ‘qualifying services’ such as the incorporation of building materials and works carried out on the fabric of the building.

The reduced rate of VAT also applies to the conversion of a building into:

• A ‘single household dwelling’
• A different number of ‘single household dwellings’
• A ‘multiple occupancy dwelling’
• Premises intended for use solely for a ‘relevant residential purpose’

A qualifying conversion is carried out when, after the conversion, the building contains a greater or lower number (but not less than one) of dwellings.

Generally

Goods and materials supplied together with services follow the VAT treatment of the service i.e. bricks bought and used by a builder performing zero-rated services would also be zero-rated.  Goods hired on their own and materials purchased separately are always standard rated as are services provided by architects, surveyors, consultants, and supervisors. Services made in the course of construction include work on the building itself prior to completion of the building and any other service ‘closely associated’ to the construction of the building including:

• work that allows the construction to take place i.e. providing/improving access points, demolition, and round works; or
• Produces work that allow the building to be used i.e. means of providing water to the building, means of providing security, and provision of soft landscaping such as laying turf.

Construction is deemed to be ‘complete’ by weighing up the relevant factors such as when the certificate of completion is issued; in accordance with the approved plans; the scope of the planning consent; and whether it is habitable and fit for purpose.

Snagging is typically carried out after a construction has been completed but can still qualify for zero rating if the work forms part of a zero-rated contract and is carried out by the same contractor.

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