Zero-Rate of VAT: When Can a Construction Project or Construction Services Qualify?

The construction of a new building is normally subject to VAT. However, zero-rate VAT may be granted if the construction is a qualifying building.

In VAT Notice 708, HMRC outlines qualifying buildings as:

• a building ‘designed as a dwelling’
• a building that will be used solely for a ‘relevant residential purpose’
• a building that will be used solely for a ‘relevant charitable purpose’

A new building can only qualify for the zero-rate of VAT if any existing structures are demolished. Where elements of an existing structure are incorporated into the new dwelling, this may qualify as the conversion, reconstruction or alteration of an existing building which is excluded from zero-rating.

For more information on zero-rated VAT for construction and qualifying buildings, read section 3.2.1 of VAT Notice 708 .

How much is VAT on building work?

The VAT rate applicable to building works varies in accordance with a variety of factors, with the zero-rated, reduced-rated and standard rate of VAT potentially applicable. As such, care should be taken to consider all relevant factors and legislation. 

Residential conversions, in addition to the renovations of residential buildings that have been unoccupied for two or more years may qualify for a reduced VAT rate of 5%. This rate also often applies to the installation of energy-saving measures, such as insulation, heating systems or other energy-efficient upgrades.

The standard rate of VAT will generally apply, where the necessary conditions to be treated as zero-rated or reduced-rated have not been met.

Where the conditions for zero or reduce-rating qualifying building services are met, this can also apply to ‘building materials’, and demolition services when provided alongside such services. For these purposes, HMRC’s definition of ‘building materials’ should be considered.  

Zero-rated services

Any services provided can be zero-rated as long as the following conditions set by HMRC are met:

• A qualifying building has been, is being or will be constructed.
• Your services are made ‘in the course of the construction’ of that building.
• Where necessary, you hold a valid certificate.
• Your services are not specifically excluded from zero-rating.

For projects that meet the criteria, zero-rated VAT can provide significant cost savings, as it effectively removes VAT from the project costs. However, not all construction work qualifies for reduced or zero rates.

Can I reclaim VAT on a new-build residential property that I intend to live in?

In relation to the construction of a dwelling, where qualifying services and building materials provided in conjunction with those services are subject to the zero-rate of VAT, building materials bought in isolation will still incur VAT. As such, the DIY Housebuilders VAT Refund Scheme should be considered to recover input tax incurred on qualifying goods. The purpose of this scheme is to put DIY builders and converters into broadly the same position as a developer selling zero-rated premises. However, this scheme does not only apply to those who undertake the construction works themselves - an individual commissioning the works, as in this case, is sufficient for this to apply.

Under this scheme, HMRC refunds input-VAT incurred on goods used in zero-rated construction work. This applies to goods that would be zero-rated when supplied alongside zero-rated services. However, VAT cannot be recovered on goods/services which are liable to the standard rate of VAT, i.e., professional fees and the hire of goods in isolation. To utilise this scheme to claim back VAT on building materials, the following criteria must be satisfied;

• the goods must be used in connection with work that comprises the construction of a building designed as a dwelling;
• the use of the building must be for a relevant residential purpose;
• the individual must be acting in a non-business capacity and constructing a dwelling to be used either by them or their relatives as a principal place of residence;
• the claim must be made within the relevant time constraints and in the appropriate manner – namely within three months of the date of completion of the property using the form VAT431NB. The claim can only be made once and must occur after completion (but within three months of the completion date). HMRC’s current stance is that for these purposes the date of completion is shown on the completion certificate completed by the local planning authority. All relevant invoices should be retained and submitted alongside this form.

Businesses that are constructing new build residential properties will need to consider the VAT treatment of their onward supply to determine whether input VAT is recoverable (as this can only be actioned where an onward taxable supply is being made).