Scott Burkinshaw
Tax Partner
How VAT works in the construction industry
When VAT was introduced in 1973, it was described as ‘a simple tax’ by Anthony Barber, Chancellor of the Exchequer. Almost 50 years later, VAT is no longer ‘a simple tax’ and this is particularly true in the construction industry.
As a starting point, VAT is chargeable at the standard rate on all goods and services unless an exception applies. However, many of the exceptions relate to the construction industry and a provision of construction services can be standard-rated, reduced-rated or zero-rated.
VAT considerations for construction
When establishing whether construction services are subject to VAT the following should be considered:
- Is a new building being constructed?
- Is the building commercial or residential?
- Is the building being converted from commercial to residential?
If you are carrying out work in the course of constructing a new commercial building, the standard rate of VAT applies. However, it is not so straight forward to apply the correct VAT treatment to other construction work. For example, the construction of a new dwelling is zero-rated only when certain conditions are met.
How different construction work impacts VAT
Work on existing buildings presents a challenge as it could be reduced-rated, for example, the conversion of a commercial property to a dwelling or you may be carrying out standard- rated repairs. Renovation work can be either reduced rated because the property has been empty for 2 years, or more, or standard rated if it is occupied.
Further consideration is required when constructing communal residential buildings such as children’s homes, residential care homes, hospices, school boarding houses, student accommodation, monasteries, and nunneries. The VAT treatment of construction work may also depend on who the customer is. Is the work being carried out for a charity? Or a disabled person?
How the Shorts team can help
The VAT rules for construction services are complex and HMRC guidance is not easy to navigate, which is why we have a specialist VAT advisory department to help construction businesses get the VAT treatment of their services correct and avoid costly penalties.
Our VAT team has extensive experience in providing VAT advice to the construction industry. Whatever your VAT query involves, get in touch with our team of specialists today.
