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Introduction

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The Construction of new buildings and renovations to existing buildings are normally charged at the Standard Rate of VAT 20%.  Services of trades persons such as carpenters, plumbers, electricians etc are usually charged at the Standard Rate of VAT 20%.

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However there are instances where construction can be Zero Rated and no VAT charged as listed below:    

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• Buiding new houses and flats - Don't have to charge VAT for Materials and Labour (provided they meet the definition of a new house) = Zero Rated

• Construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities  = Zero Rated 0%  

• Conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building = Zero Rated 0%  

• Conversion (other than for housing associations) of a non-residential building into a qualifying dwelling or communal residential building and conversions of residential buildings to a different residential use = Reduced Rate 5%

• Renovation or alteration of empty residential premises = Reduced Rate 5% 

• Approved alterations to listed dwellings and communal residential buildings, and certain listed buildings used by charities (rate shown with effect from 1 October 2012) =  Standsard Rated 20%

• Alterations to suit the condition of people with disabilities = Zero Rated 0% Reliefs from VAT for disabled and older people. See  (VAT Notice 701/7)

• Installation of energy saving materials; and grant funded heating system measures and qualifying security goods = Reduced Rate 5%  (Energy-saving materials and heating equipment (VAT Notice 708/6)

• Development of residential caravan parks = Zero Rated 0%  

• First time gas and electricity connections  = Zero Rated 0%   (Fuel and power (VAT Notice 701/19)

• Construction work on children’s homes = Zero Rated 0%

• Construction work on residential care homes = Zero Rated 0%

• Construction work on hospices = Zero Rated 0%

• Construction work on student accommodation = Zero Rated 0%

• Construction work on school boarding houses = Zero Rated 0%

• Installation of mobility aids for the elderly for use in domestic accommodation = Reduced Rate 5%

• Home improvements on domestic property situated in the Isle of Man = Reduced Rate 5%  Isle of Man VAT Notice Home improvements available from:

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Note: There are serveral conditions that have to be met to be able to zero rate and apply reduced rates as above.

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Please refer to the attached HMRC notice 

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Buildings and construction (VAT Notice 708)

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Construction Industry Scheme

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The Construction Industry Scheme is a HMRC process whereby Contractors working in the building and construction industry deduct tax from payments made to their subcontractors and pay the money

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deducted over to HMRC.  To do this, contractors are required to register with HMRC.  Subcontractors are not required to be registered but if they don't they will have tax deducted at the higher rate (not 20%) by their contractor making payments to them. The tax deductions are a made from the non materials portion of the amounts being paid.

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Contractors

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• Sole Traders

• Limited Companies

• Partnerships

• Government Departments

• Local Councils

• Businesses spending £3M in a year on construction  

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 Note contractors can also be subcontractors when the do work for other contractors

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Construction Industry Scheme (CIS) and Reverse Charge VAT

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Prior to 1 March 2021, subcontractors invoicing there VAT registered contractors for work done would as normal be required to include VAT at 20% on their invoices. 

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From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.

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The charge applies to standard and reduced-rate VAT services:

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• For individuals or businesses who are registered for VAT in the UK

• Reported in the Construction Industry Scheme

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What does Reverse Charge Mean? It means that instead of charging VAT on your invoice to your contractor, you just show the net amount and add the words "Reverse Charge Applies", "Customer to Account for VAT" on the invoice. Your contractor will then be required to account for the VAT that you would normally have charged (Pre introduction of Reverse Charge Rules) on their VAT return in Box 1 (VAT on Sales) and also in Box 4 (VAT on Purchases). Therefore in effect the Contractor will not pay any VAT to HMRC as the Box 1 VAT amount payable will be cancelled out by the Box 4 VAT recoverable amount due from HMRC.

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Example:

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Subcontracor A has done work for £100,000 for Contactor B. Subcontractor A will include £100.000 on their invoice and will not include any VAT, just the words "reverse charge" "customer to account for VAT".  The contractor will include £20,000 reverse charge output VAT (20% of £100,000) in their sales VAT (box 1) and £20,000 reverse charge input VAT recoverable in their purchase VAT (box 4) on their VAT return when they receive the invoice from subcontractor A. Therefore contractor A pays no VAT to HMRC.  Also contractor B pays no VAT to HMRC as their VAT return will show £20,000 reverse charge output VAT payable and £20,000 reverse charge VAT recoverable from HMRC.  So in effect a nill box 5 and no VAT to pay or recover from HMRC.  

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When should Subcontractors use the Reverse Charge Procedure

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They must use the reverse charge for the following services:

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• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services

• constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence

• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure

• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration

• painting or decorating the inside or the external surfaces of any building or structure

• services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

 

When should Subcontractors not use the Reverse Charge Procedure

 

Do not use the reverse charge for the following services, when supplied on their own:​

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• scaffolding hire (with no labour)

• carpet fitting

• making materials used in construction including plant and machinery

• delivering materials

• work on construction sites that’s clearly not construction - for example, running a canteen or site facilities

• extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose

• drilling for, or extracting, oil or natural gas

• manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site

• manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site

• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants

• making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements

• installing seating, blinds and shutters

• installing security systems, including burglar alarms, closed circuit television and public address systems

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For more information on how to apply Reverse Charges in the Construction Industry please refer to HMRC's Link below.

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Domestic reverse charge procedure (VAT Notice 735)

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-Contains public sector information licensed under the Open Government Licence v3.0.

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