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Most supplies and services are charged the standard VAT rate (20%). If you work in the construction sector, your client may qualify for VAT Notice 708. This means reduced to zero VAT rate, helping those who cannot claim input tax to save on construction costs.
This serves as your updated guide on VAT Notice 708, whether you are a contractor or client, covering how it works, its scope, and more.
What is VAT [2024]?
Value Added Tax (VAT) is a tax on consumer spending, charged on most goods and services at a standard rate of 20%. Your business needs to register for VAT when your annual taxable turnover exceeds £90,000 (also the de-registration threshold), then charge at 20%, 5% (reduced-rated), and 0% (zero-rated).
Zero-rated items mostly 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.
UK VAT is an extensive area of tax with different rules for various sectors. Goods and services in the construction industry, for instance, may be under VAT Notice 708 (see more below). For more information about VAT, refer to Value Added Tax Act 1994, as it contains all updated VAT rules.
What is VAT Notice 708?
Certain construction services and projects may qualify for VAT Notice 708, which can cut the standard rate down to zero or reduced rate. 20% is the usual VAT on business rates charged on goods or services, but when you work for property owners whose projects qualify for VAT Notice 708, a reduced rate of 5% or zero rate may apply.
If you are a builder or developer of a qualifying client, construction costs may be cheaper. This offers significant relief to non-VAT registered property owners who cannot reclaim VAT, allowing them to save 15% (even up to 20%) of what they would have been paying if not for this policy.
If you hire builders or developers for your renovation, you need to complete certificates to manage the VAT correctly. Alternatively, you can register as a Development Company and handle the work yourself without hiring others.
Whether to register for VAT or not, this guide can help you decide: Advantages and Disadvantages of Being VAT Registered
When Does VAT Notice 708 Apply?
VAT Notice 708 applies to eligible construction building materials and services, including renovation projects, maintenance, repairs, and the first sale or long lease of a property, which may be zero-rated or reduced-rated. The applicable rate depends on whether your project meets the qualifications for these VAT rates.
Construction supplies qualify for reduced or zero rates when they are typically integral to a building. Examples include doors, air conditioning, bathroom accessories, flooring, gas and electrical appliances, fire alarms, heating systems, plumbing, guttering, and solar collectors.
To be clear, zero rated does not mean VAT exemption. They are still charged VAT but at a zero rate. Qualifying buildings may be zero-rated if they are buildings turned as follows:
- Residential use
- Relevant residential purposes (e.g., residential home for the elderly, convent, hospice, etc.)
- Relevant charitable purposes
- Transitional historical arrangements (e.g., village halls or places of worship)
Meanwhile, reduced rate may apply in the following cases:
- 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 as long as they are:
- Non-residential buildings converted to residential use
- Substantially reconstructed protected buildings
All these have different qualifications criteria, so it is best that property owners and developers work with tax experts to determine if their nature of project qualifies, and which VAT rates apply.
Qualifying Construction Services
Generally, construction works such as the following may be eligible for VAT Notice 708:
- 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., a house into a flat).
Qualifying Construction Projects
Here are the qualifying construction projects for VAT Notice 708 and their respective rates:
Zero-Rated VAT Construction Works
- New qualifying dwellings and communal residential buildings
- New buildings for charity purposes
- Housing association of a non-residential real estate 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 or hot water system measures (e.g., hot water tanks), energy-saving materials for microgeneration (e.g., evacuated tube for storing energy to heat water, wind turbines, etc.), and qualifying security goods
VAT Notice 708 Exemptions
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, VAT Notice 708 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 VAT Notice 708 too, such as the following:
- Professional services (e.g., 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
Compliance and VAT Tips
Here are some to keep in mind:
- Ensure construction projects are eligible for reduced or zero VAT rates.
- Obtain necessary certificates before making transactions at reduced or zero rates.
- Keep detailed business records (e.g., certificates, invoices, and payments).
- Track all qualifying services and goods and ensure invoices match for VAT returns.
- Familiarise yourself with the Making Tax Digital (MTD) system, as compliance is required by April 2026, the earliest.
- File VAT returns accurately and on time and be sure to maintain electronic transaction records.
- If you built the property yourself, reclaiming VAT on property renovations or new projects can be done through the DIY Housebuilders Scheme Claim.
- Construction entities can reclaim VAT by keeping records, submitting quarterly returns, and ensuring accuracy for HMRC approval.
- Be cautious: incorrect VAT rates on certificates result in penalties, which will be based on uncharged VAT amounts.
FAQs About Construction VAT
Builders typically charge VAT on materials at the same rate as their services. If their work is zero-rated or reduced-rated, the materials follow suit, but some items may still be standard-rated.
No, a builder who is not VAT registered cannot reclaim VAT on purchases for their business. While there are a few exceptions, the general rule is that only VAT-registered businesses can reclaim VAT.
You cannot claim VAT back on contractors if they are not VAT registered, even if they provide a VAT invoice for materials. Only VAT-registered contractors enable you to reclaim VAT on their services.
Subcontractors are not involved in the main contractor’s VAT return if they are VAT-registered and apply the reverse charge. Instead, the main contractor accounts for the VAT on their own VAT return.
In a VAT reverse charge scenario, the customer pays the VAT directly to HMRC instead of the supplier. This process eliminates the need for the supplier to charge VAT, effectively removing the middleman in the transaction.
Get Advice from VAT Specialists
VAT Notice 708 reduces the standard rate to 5% or zero on qualifying projects, helping property owners who cannot claim input tax reduce their construction expenses. Identifying which projects, services, or supplies are eligible for the lower VAT rates can be complicated.
Legend Financial is here to help. We have successfully solved hundreds of VAT cases for over a decade, gaining many loyal clients up to now. Reach us today!
