VAT can be particularly confusing for construction businesses and related trades. Whether you’re a builder, electrician, plumber, roofer, plasterer, groundworker, heating engineer or specialist installer, the VAT treatment of your work can depend on the type of property, the work you are carrying out and who your customer is.
You may need to charge VAT at 20%, 5% or 0%, or you may need to use the domestic reverse charge.
Getting the VAT treatment wrong can lead to problems with your VAT returns, so it is important to understand the basic rules.
This guide provides an overview of some of the most common VAT treatments for construction and related work. However, construction VAT has a number of detailed rules and exceptions, so you should always check the specific circumstances of a job before deciding what VAT to charge.
20% VAT: The Standard Rate
The standard rate of VAT is 20%, and this applies to most construction work unless a specific zero-rate or reduced rate rule applies.
For many businesses in the construction sector, 20% will be the starting point.
Examples of work that will commonly be standard rated include:
- General building work and repairs
- Extensions to existing homes
- General renovation work that does not qualify for a reduced rate
- Decorating and painting
- Plumbing work
- Electrical work
- Roofing repairs
- Plastering
- Carpentry and joinery
- Landscaping and many types of external works
- General maintenance
- Construction work on many commercial properties
- Supply-only sales of many building materials and specialist equipment
For example, if a plumber carries out a standard bathroom installation in an existing home, this will generally be subject to VAT at 20%.
Likewise, an electrician installing a new electrical system as part of an ordinary home extension would generally charge 20%, unless a specific VAT relief applies.
It is important to remember that 20% is the standard rate, not necessarily the rate you will charge on every construction job.
The type of work, the property and the customer’s circumstances can all affect the VAT treatment. There is also an important distinction between the VAT rate and the domestic reverse charge. A construction service can be standard rated at 20% but still be subject to the domestic reverse charge. In that situation, the subcontractor does not add the 20% VAT to the amount the customer pays; instead, the customer (the contractor) accounts for the VAT themselves.
0% VAT: Qualifying New Builds and Certain Energy-Saving Work
Some construction work can qualify for 0% VAT, but there are specific conditions that need to be met.
New houses and flats
The construction of a qualifying new dwelling, such as a new house or flat, can be zero-rated for VAT.
This can apply to qualifying construction services and building materials supplied as part of the construction work.
For example, a contractor building a qualifying new house may be able to zero-rate their work. Similarly, trades such as plumbers, electricians, plasterers and carpenters may be able to zero-rate qualifying work carried out in the course of building the new dwelling.
However, simply describing a project as a “new build” does not automatically mean that everything supplied for the project is zero-rated.
There are specific conditions that need to be met for a building to qualify. There are also rules around mixed-use buildings, annexes and other types of development.
Energy-saving materials
There is also a temporary 0% VAT rate for certain energy-saving materials when they are installed in qualifying residential accommodation and certain charitable buildings.
Examples currently include:
- Air-source heat pumps
- Ground-source heat pumps
- Water-source heat pumps
- Solar panels
- Insulation
- Certain central heating and hot water controls
- Electrical storage batteries
- Certain micro combined heat and power units
- Certain wind and water turbines
The 0% rate currently applies to qualifying installations in Great Britain until 31 March 2027, after which the rate is due to revert to 5%.
This can be particularly relevant to specialist trades.
For example, a business installing an eligible air-source heat pump in a qualifying home may be able to apply the 0% rate to the installation.
It is important not to confuse this with ordinary air-conditioning installation, which is generally standard rated at 20%.
There are also specific rules around what work qualifies as part of the installation, so specialist installers should check the current rules carefully.
Other examples of 0% construction work
There are some other circumstances where construction related work can qualify for 0%, including certain:
- Construction of buildings for relevant residential purposes
- Construction of buildings for qualifying charitable purposes
- Conversions carried out for housing associations
- Works to accommodate the needs of disabled people
- First-time gas and electricity connections
These areas have their own conditions, so the 0% rate should not be applied without checking that the particular job qualifies.
5% VAT: Qualifying Renovations, Conversions and Installations
There are also circumstances where construction and related work can qualify for the reduced rate of 5% VAT.
Examples can include:
- Certain conversions of non-residential buildings into residential properties
- Certain conversions of residential properties that result in a change in the number of dwellings
- Renovation or alteration of qualifying residential properties that have been empty for at least two years
- Certain qualifying energy-saving installations
- Certain grant-funded heating equipment
- Certain qualifying mobility aids installed in domestic accommodation
For example, if a commercial building is converted into flats and the conditions for the reduced rate are met, qualifying construction services involved in the conversion may be subject to 5% VAT.
Similarly, certain qualifying heating and energy-saving installations can benefit from reduced rates depending on the circumstances.
The rules can be particularly relevant to specialist trades such as heating engineers, renewable energy installers and insulation installers.
However, the fact that a product or service is marketed as “energy efficient” does not automatically mean it qualifies for 5% VAT.
The exact product, installation and circumstances need to be considered.
Installation matters
One particularly important point for specialist installers is that the VAT treatment can depend on whether you are supplying and installing the qualifying product.
For example, certain energy-saving materials can qualify for VAT relief when installed by a contractor, whereas simply selling the product without installation can be subject to the standard 20% rate.
This is why businesses supplying products such as solar panels, heat pumps or insulation need to consider both the product and the nature of the supply when deciding which VAT rate to use.
Domestic Reverse Charge: When You Don’t Charge the VAT
The domestic reverse charge is particularly important for construction businesses and subcontractors.
Unlike the 20%, 5% and 0% rates discussed above, the domestic reverse charge is not a separate rate of VAT.
Instead, it changes who accounts for the VAT.
Where the domestic reverse charge applies, the subcontractor does not charge the VAT to their customer. Instead, the customer accounts for the VAT themselves on their VAT return.
The domestic reverse charge generally applies to qualifying building and construction services where:
- The supplier is VAT registered in the UK
- The customer is VAT registered in the UK
- The payment is reported under the Construction Industry Scheme (CIS)
- The services are standard-rated or reduced-rated
- The customer has not notified the supplier that they are an end user.
The domestic reverse charge has applied to certain construction services since 1 March 2021.
CIS does not automatically mean domestic reverse charge
It is easy to assume that if a job falls under CIS, the domestic reverse charge must automatically be used.
However, CIS and the VAT domestic reverse charge are separate rules.
Most qualifying construction services reported under CIS will fall within the domestic reverse charge, but there are important exceptions, particularly where the customer is an end user.
For example, a housing association may be a CIS contractor but purchase construction services for its own properties rather than to make onward supplies of construction services. It can therefore qualify as an end user for domestic reverse charge purposes.
If it notifies its supplier in writing that it is an end user, the normal VAT rules apply instead of the reverse charge.
This is an important distinction for construction businesses to understand:
A customer can fall within CIS without the domestic reverse charge necessarily applying to the invoice.
What about a large housebuilder?
A different situation would apply where you are working as a subcontractor for a main building contractor or housebuilder.
For example, if a subcontractor carries out bricklaying, electrical, plumbing or roofing work for a large housebuilder as part of a development, the work may fall within CIS and the domestic reverse charge will generally apply where all the other conditions are met.
This is because a main building contractor is generally not an end user for domestic reverse charge purposes. It is purchasing construction services to use in making onward supplies of construction services.
The key point is that the domestic reverse charge is concerned with how the construction services move through the supply chain, rather than simply whether the customer ultimately owns the property.
What Does the Reverse Charge Mean for Your Invoice?
Where the domestic reverse charge applies, you should not add the VAT to the amount payable by your customer.
Instead, your customer accounts for the VAT themselves.
Your invoice should make it clear that the domestic reverse charge applies and include the appropriate wording.
For a subcontractor, this means the amount received from the customer will normally be the net amount, rather than the net amount plus VAT.
The customer then accounts for the VAT under the reverse charge on their own VAT return and, where eligible, can normally reclaim the VAT in the usual way.
Your accounting software also needs to be set up correctly to record the transaction.
What VAT Rate Should You Charge? A Quick Checklist
Before raising an invoice, ask yourself:
1. What type of property am I working on?
Is it a new dwelling, an existing residential property, a commercial property or another type of building?
2. What exactly am I supplying?
Is it construction, repair, maintenance, conversion, renovation, installation, professional services or simply the supply of goods?
3. Could the work qualify for 0% VAT?
Consider qualifying new builds, certain charitable or residential buildings, disability adaptations and qualifying energy-saving installations.
4. Could the work qualify for 5% VAT?
Consider qualifying conversions, renovations of properties that have been empty for at least two years and certain qualifying installations.
5. If neither applies, is it 20%?
For most ordinary construction and related work, 20% will be the correct starting point.
6. Is the work within CIS?
If so, consider whether the domestic reverse charge applies.
7. Is my customer VAT registered?
The domestic reverse charge requires the customer to be VAT registered. If they are not, then charge standard above rate.
8. Is my customer an end user or qualifying intermediary supplier?
If they qualify and have notified you in writing, the reverse charge will not apply and you must charge VAT as normal.
Common Questions About Construction VAT
Do builders charge VAT on new builds?
Not necessarily. The construction of qualifying new houses and flats can be zero-rated, provided the relevant conditions are met. However, not every project described as a “new build” qualifies for 0% VAT.
What VAT rate do builders charge?
Most construction work is subject to the standard 20% VAT rate. However, certain construction work can qualify for 0% or 5% VAT, depending on the type of building, the work being carried out and the customer’s circumstances.
Is VAT charged on plumbing and electrical work?
Usually, yes. Plumbing and electrical work will generally be subject to 20% VAT unless a specific VAT relief applies or the domestic reverse charge applies to the supply.
Is roofing work 20% VAT?
Most ordinary roofing repairs and replacement work will be subject to 20% VAT. However, the VAT treatment can differ where the work forms part of a qualifying construction project or involves qualifying energy-saving materials.
Is air conditioning installation 20% VAT?
Ordinary air-conditioning installation is generally subject to 20% VAT. However, certain air-source heat pumps can qualify for the current 0% VAT rate when the relevant conditions are met. These should not be confused with ordinary air-conditioning systems.
Is solar panel installation 0% VAT?
Qualifying solar panel installations in eligible residential accommodation can currently benefit from the 0% VAT rate in Great Britain, subject to the relevant conditions. The current 0% relief is due to run until 31 March 2027.
Does CIS mean I have to use the VAT reverse charge?
No. CIS and the VAT domestic reverse charge are separate rules. Most qualifying construction services reported under CIS will also fall within the reverse charge, but there are exceptions, including supplies to qualifying end users and intermediary suppliers.
Does the reverse charge apply to zero-rated work?
No. If a construction supply is genuinely zero-rated, there is no VAT to account for under the domestic reverse charge.
Can construction work be charged at 5% VAT?
Yes. Certain types of conversion, renovation and alteration work can qualify for the reduced 5% rate, as can certain qualifying energy-saving and heating installations. The specific conditions need to be checked before applying the reduced rate.
Do I charge VAT to a homeowner?
If you are VAT registered and carrying out standard-rated work for a homeowner, you would normally charge VAT at 20%.
However, certain work on domestic properties can qualify for 0% or 5% VAT depending on the circumstances.
The domestic reverse charge does not normally apply to a private homeowner because the homeowner will not be VAT registered.
What happens if I charge the wrong VAT rate?
Charging the wrong VAT rate can result in an incorrect VAT return and potentially leave your business having to correct the error or pay additional VAT.
If you are unsure about the VAT treatment of a particular construction project, it is better to check before issuing the invoice rather than trying to correct the VAT afterwards.
Need Help With Construction VAT?
VAT for construction businesses and related trades can be complicated, particularly when you are dealing with a combination of CIS, domestic reverse charge, zero-rated work and reduced-rate VAT.
Whether you are a general builder, electrician, carpenter, plumber, roofer, heating engineer or specialist installer, understanding the VAT treatment of your work can help you invoice your customers correctly and avoid unexpected VAT liabilities.
If you are unsure which VAT treatment applies to your work, feel free to contact JTR Accountancy below.