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Reduced rated VAT for Construction

When to apply the 5% VAT rate for construction or building work

In some instances the supply of construction, conversion or renovation of property can be reduced rated for VAT.

Being aware of the correct VAT rate for your services will not only reduce your VAT bill, it could also make your business more competitive when quoting for jobs. For example – a £6,000 job including VAT at the full rate (20%) could actually be £5,250 to your customer if the reduced rate of 5% was applied, or even £5,000 if zero-rated.

VAT liability of supplies

The liability of supplies related to construction, conversion or renovation is a complex area of VAT and getting it wrong could result in penalties, so it’s advisable to check with your accountant if you’re unsure which rate applies to your business.

In general terms, supply of the following services are reduce rated for VAT purposes:

Zero-rated VAT

1. Construction of certain new residential buildings
2. Construction of certain new charitable buildings
3. Converting a non-residential building to a residential for a housing association
4. Alteration of a building in certain energy saving materials in Great Britain and grant-funded heating systems
5. Qualifying works on disabled persons homes

Reduced rated (5%) VAT

1. Converting a non-residential building to a residential (not for housing association)
2. Converting premises into a different residential use
3. Renovating or altering an empty residential property
4. Qualifying works on disabled persons homes

Sometimes businesses must apportion construction supplies between elements which qualify for VAT relief and those which do not. Our experienced team can help you with this!

The Capital Goods Scheme, which allows you to spread the initial VAT claimed on some capital items (like expensive land or property) over a number of years, also often applies to significant building or construction projects.

DIY builders can also benefit from the DIY Builders Scheme, which allows you to claim refunds of VAT for certain non-business construction or conversion work.

We hope that you’ve found this article helpful. For further advice regarding reduced rated VAT for construction please contact our expert team.

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