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Which VAT Rate Applies To My Project?

This article aims to give some general advice on construction VAT rates for your consideration but we always recommend seeking advice from a chartered accountant before undertaking a construction project.  At the time of writing, most residential construction works are subject to the 20% VAT rate.  Clearly, this is a significant factor which influences the scope of works for many projects and can often be the difference as to whether some developments are viable at all.  Many people attempt to mitigate VAT by making substantial payments to builders in cash.  However, this route is not recommendable for several reasons.

Why not to pay builders in cash:

  1. Clients who collude with builders to avoid paying VAT can incur liability – sanctions may include unlimited fines and even a custodial sentence
  2. If a construction contract should fall into dispute, proof of payment may need to be relied upon in the litigation process – payments in cash are unlikely to provide this security
  3. Similarly, workmanship guarantees and product warranties might be difficult to rely on where no proof of payment is able to be provided

There are many types of residential construction works which are subject to a reduced VAT rate of 5% and some where VAT is zero-rated.  Clearly, these savings can be significant for larger home improvement projects where costs can be tens or even hundreds of thousands of pounds.  Such a significant sum can make the difference as to whether a project is viable or it might allow you to undertake additional works.  Therefore, it is always worth investigating whether your project qualifies for reduced or zero-rated VAT.  Unfortunately, most builders do not understand the construction VAT rates well enough to be able to advise their clients – this often results in clients paying more than they need to for a project.


Which types of project are 5% VAT?


The most common residential projects which benefit from a reduced rate of VAT (5%) are as follows:


1. Vacant Properties: Alterations and renovation to a property which qualifies as ‘vacant’ can be subject to the reduced 5% VAT rate.

2. Non-Residential Conversions:  The conversion of a non-residential property such as a shop into a dwelling or flats can qualify for the reduced 5% VAT rate.

3. Houses of Multiple Occupancy (HMO) Conversions: Landlords are able to benefit from the reduced VAT rate of 5% for works which relate to the conversion of a property into an HMO.

4. Energy Saving Materials:  The installation of energy saving materials into a residential property generally benefit from the reduced 5% VAT rate.

5. Flat Conversions: The conversion of a property where additional dwellings are create such as splitting a house into two flats can be subject to the reduced 5% VAT rate.


Which types of project are Zero-Rated VAT?


Finally, there are a number of construction works which are zero-rated VAT.  The most common types of construction projects are as follows:


1. New Builds: Building new dwellings whether as houses or flats benefits from zero-rated VAT.

2. Disability Alterations: Alterations to a dwelling to make it suitable for people with disabilities are zero-rated VAT.


For up-to-date information on construction VAT rates, please refer to the HMRC website.

If you have a project in mind which you would like to discuss, please feel free to contact us to see how we can help.