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On a stand-alone basis, the standard construction VAT rates of 20 per cent VAT apply, including building work and materials. However, HMRC ensues VAT Notice 708 that enables certain projects to be eligible to a 5 per cent VAT-reduced rate or up to a zero rate, helping property owners who cannot claim input tax to save on construction costs
In this article, we aim to make this topic easier to comprehend for the property owner (otherwise called customer or client) and the builder (contractor, subcontractor, and developer). We delve first into the bigger picture of how VAT works, then onto what this Notice is, including when and how it applies to different construction works, exemptions, and compliance requirements.
What is VAT?
Any businesses in the UK with an annual taxable turnover of more than £85,000 are required to undergo VAT registration. After that, they apply the standard VAT rate of 20 per cent to their goods or services (taxable supplies), except for specific items or circumstances that qualify for zero rated or reduced rated classification.
Zero-rated items include children’s apparel, newspapers and books, motorcycle helmets, and most goods exported from Great Britain and Northern Ireland to countries outside the UK or EU. It also applies to the goods coming from NIR exported to EU businesses that are VAT-registered.
This is where VAT Notice 708 comes in. This policy specifically caters to buildings and construction VAT, discussed further below, which cuts the standard rate down to zero rated or reduced rated percentage, whichever is applicable, for developers or builders who purchase supplies and provide services for property owners on projects that qualify for the policy.
How much VAT is charged or paid—whether standard rated, reduced rated, or zero rated—is reported to HMRC via VAT return, which should be done once an individual or business is VAT-registered, regardless of whether they have no VAT to reclaim or pay. VAT return submissions should be every after three months, also known as the accounting period.
What is VAT Notice?
When builders or developers purchase goods or deliver services, they usually pay or charge 20 per cent for construction VAT rates, respectively, but when they work for property owners whose projects qualify for the notice, a 5 per cent reduced rate or zero rates will apply. This allows property owners to save 15 per cent—even up to 20 per cent—of what they would have been paying if not for this policy, especially since most of them cannot reclaim input tax.
The 5 per cent reduced rate or zero rate applies to the materials used for the construction work as well, wherein the VAT-registered builder purchases supplies on behalf of the property owner, reclaims the charged VAT, and then adds it to the building owner’s bill.
If the property owner chooses to hire builders or developers for their renovation or other construction projects, they will be required to complete the certificates, which they will later pass on to their developers to work out the VAT aspects. But they can also choose to register as a Development Company to do the job themselves, specifically when they choose to accomplish the work without hiring developers, builders, or contractors.
Contractors or builders usually charge ecommerce VAT at the standard rate of 20 per cent for their services even if the property owner or hirer’s construction work qualifies for the reduced 5 per cent rate, increasing the cost of the work for property owners who are not able to claim input tax.
Applying the wrong rate, whether by the property owner or builder, can pose problems with the HMRC later on, so it’s best to know which projects qualify in the policy before partaking in any construction projects.
When Does This VAT Notice Apply?
This VAT Notice applies to eligible construction materials and services, including conversion or renovation projects, maintenance and repairs, the first sale of property, or first long lease, and may either be zero rated or reduced rated. It all depends if the project first qualifies for these rates of VAT on building work, which will be covered further below.
The rule of thumb is that the rate of services and materials depends on the rate of VAT charged by the builder. For instance, if they are zero-rated, then the supplies they purchase are zero-rated too; if reduced-rated, then the goods are also reduced-rated, and so forth.
Construction supplies are only eligible for reduced or zero rates when they are considered ordinarily incorporated in a building. Some examples include doors, air conditioning, bathroom accessories, flooring materials, gas and electrical appliances, fire alarms, heating systems, plumbing installations, guttering, solar panels, and more.
Qualifying buildings may be zero-rated if they are buildings turned as follows:
- Residential
- Relevant residential purpose (e.g., residential home for the elderly, convent, hospice, etc.)
- Relevant charitable purpose
- Transitional historical arrangements (e.g., village halls or places of worship)
On the other hand, they can be reduced rated if they are as follows and fit their criteria requirements:
- Building conversions to a different residential use
- Alterations or renovations of unoccupied residential premises
The first sale or long lease of a property can be zero-rated if they are as follows:
- Non-residential buildings converted to residential use
- substantially reconstructed protected buildings
All these have different criteria for qualifications, so it’s best that property owners and developers work with tax experts to determine whether their specific projects qualify for a reduced rate of 5 per cent or zero rate.
Construction Services Subject to This VAT Notice
A 5 per cent reduced rate or zero rates will depend on how the property is treated. In certain circumstances, the buildings mentioned above will be eligible. Generally, construction works such as the following are subject to this VAT Notice:
- Renovations for dwellings (residential properties) that have been unoccupied for more than two years.
- Conversions of a commercial (non-residential) property into a dwelling to be used for relevant residential purposes (e.g., barn conversion).
- Conversions of single household residential property into a house of multiple occupations (e.g., bed-sits).
- Construction works to change the number of dwellings (e.g., house into a flat).
How This VAT Notice Applies to Different Types of Construction Works
Here are the qualifying construction projects and their respective VAT rates according to this VAT Notice, excluding those on standard rates:
Zero-Rated VAT Construction Works
- New qualifying dwellings and communal residential buildings.
- New buildings for charity purposes.
- Housing association of a non-residential building converted into a communal residential building or a qualifying dwelling.
- Alteration projects to accommodate the condition of people with disabilities.
- First-time installation of electricity and gas connections.
Reduced-Rated (5 per cent) Construction Works
- Alteration or renovation projects for empty residential premises;
- Mobility aid installations for the elderly for domestic accommodation purposes;
- Installations of grant-funded heating system measures, energy-saving materials, and qualifying security goods.
Exemptions to This VAT Notice
Property owners who choose to do the construction work themselves, unless they register as a development company, will not be eligible for the reduced rate. Moreover, this VAT Notice makes sure to clarify which goods and services can qualify for reduced or zero rates.
For construction materials, only items ordinarily incorporated in the building qualify. Ineligible supplies include:
- Audio equipment
- Integrated and free-standing appliances (e.g., dishwashers, cookers, coffee machines, etc.)
- Electrical components for gates and garage doors
- Consumables
- Curtains, carpets, and blinds
Some construction projects are not covered under this VAT Notice too, such as the following:
- Professional services, such as architectural, surveying, consultancy and supervisory services
- Hire of goods
- Installation of non-building materials (as listed above)
- Scaffolding
- Landscaping
In the case of buildings, any work carried out on other buildings within site will not be eligible for zero or reduced rates, such as these:
- Stables
- Sheds
- Annexes (e.g., granny annexes)
- Detached swimming pools
- Detached workshops or store rooms
- Rooms above or attached to a detached garage
How to Comply with This VAT Notice
If the construction project is eligible for reduced or zero rates, business records such as certificates, invoices, and payments are required. Certificates must first be obtained so the builder can proceed toward making transactions using the reduced 5 per cent rate or zero rate, complying with VAT return submission deadlines, and claiming VAT back when the work is completed.
Property owners or builders need to keep track of all the qualifying services and goods, including the receipts, and every invoice should be ensued to the same name for the purpose of VAT returns. By April 2026, all VAT-registered businesses will have to completely transition to submitting their returns via the Making Tax Digital (MTD) system, so they should be familiarising and using this method as early as now. Businesses are expected to file returns accurately and promptly and, as much as possible, keep electronic files of their transactions.
Property owners who did the construction themselves can reclaim their VAT through the DIY Housebuilders Scheme Claim. Construction or development entities, on the other hand, can reclaim their VAT via regular process—keep their transaction records, submit their returns after every three months, and request a VAT claim, which HMRC will approve once every detail provided is found to be accurate and in order.
This VAT Notice specifically imposes penalties on wrong determination of the rate of VAT found in the VAT certificate. Issuing incorrect certificates attract penalties that can be equivalent to the uncharged VAT amount. This could either be because the property owner or developer determined that they are rated the standard VAT instead of the applicable reduced rate, or vice versa.
Wrap-Up
VAT Notice 708 applies a 5 per cent reduced or zero rate to qualifying building works, helping property owners who cannot claim input tax reduce their construction expenses. In the case of builders or developers, correctly determining which rates of VAT apply to the project is crucial so they can avoid penalties.
This policy can be very complicated, and not all contractors and subcontractors have a complete grasp of this matter. Once involved in any construction project, it’s best to consult with tax experts who know the ins and outs of construction VAT and all the other relevant tax matters.Legend Financial is here to help. Reach us today!
References
Buildings and construction (VAT Notice 708). (n.d.). Retrieved from Gov.UK: https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708
VAT Notice 708. (n.d.). Retrieved from Source Property: https://sourcedproperty.co/vat-notice-708/
Zero rating the construction of new buildings. (n.d.). Retrieved from Croner-I Navigate: https://library.croneri.co.uk/cch_uk/cxe/notice-708-sec-3
VAT Notice 708 – reduced rate on conversions. (12 May 2021). Retrieved from Accounting Web: https://www.accountingweb.co.uk/any-answers/vat-notice-708-reduced-rate-on-conversions
VAT Notice 708. (n.d.). Retrieved from Gov.UK HMRC Community Forums: https://community.hmrc.gov.uk/customerforums/vat/47b1c00f-506c-ed11-97b2-00155d3ba57b
A guide to VAT for residential property developers. (n.d.). Retrieved from the VAT people: https://www.thevatpeople.co.uk/sectors/land-and-property-development/advice-hub/when-can-construction-project-or-construction-services-qualify-zero-rated-vat
When To Apply The 5% VAT Rate Building Services. (May 2016). Retrieved from Tax Insider: https://www.taxinsider.co.uk/when-to-apply-the-5-vat-rate-building-services
Empty Homes/ 10 Years Reduced VAT Rate. (n.d.). Retrieved from Aberdeenshire Council: http://publications.aberdeenshire.gov.uk/dataset/39136040-708e-4bbe-a655-a2e7867fa27a/resource/179ad8de-e074-460b-9395-a875718dd4a5/download/10-years-reduced-vat-rate.pdf
How VAT works. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/how-vat-works
