VAT on Construction: New Builds at 0%, Repairs at 20% & the Reverse Charge

Quick answer: There is no single VAT rate for construction work — the rate depends on what is being built. Building a genuinely new house or flat is zero-rated (0%), qualifying conversions and renovations of homes empty for two years or more are reduced-rated (5%), and most other building work — repairs, maintenance and extensions to existing homes — is standard-rated (20%). On top of that, since 1 March 2021 most supplies between VAT-registered construction businesses use the domestic reverse charge, so the customer, not the supplier, accounts for the VAT. Get the rate wrong and either your customer overpays or you underpay HMRC, so the classification matters on every job.

The three rates at a glance

Construction is one of the few sectors where all three VAT rates are in everyday use. HMRC's rulebook is VAT Notice 708 (Buildings and construction), and its starting point is blunt: most building work is standard-rated, and a lower rate applies only where the work meets specific conditions you can evidence.

Zero-rated is not the same as exempt. A builder doing zero-rated work charges no VAT but still reclaims VAT on materials and subcontractors — that is why new-build work can be priced without VAT throughout the chain. Exempt work, such as letting a residential property, blocks input VAT recovery instead. Our zero-rated vs exempt guide explains the difference.

New builds at 0%: what actually qualifies

Work is zero-rated only if it creates a genuinely new, self-contained dwelling. HMRC's tests, set out on GOV.UK's VAT for builders pages, are strict:

• The dwelling must be self-contained, with no internal doors or connections to another property.
• It must be usable independently and capable of being sold on its own.
• It must have proper planning permission.
• Any existing building on the site must have been demolished completely to ground level — unless the new dwelling is created by extending an existing building.

A "granny flat" or annexe added to an existing house fails the test: because it cannot be used or sold separately from the main house, work on it is standard-rated at 20%. The same applies to a shop with a flat above it — only the residential part can be zero-rated, so split the invoice.

Timing matters too. Zero-rating covers work done "in the course of construction", including site preparation and demolition. Once the building is finished, later work is standard-rated — the only exception is snagging, correcting defects in the original work.

Worked example — the new-build saving. A contractor builds a detached house for a net price of £240,000. Zero-rated, the client pays £240,000 and no VAT. Had the same work been standard-rated, the bill would have been £288,000 — £48,000 of VAT. The contractor still reclaims VAT on its materials and subcontractors.

Materials follow a special rule: "building materials" supplied by the person doing the work — bricks, timber, fitted kitchens and bathrooms, heating systems — are zero-rated with the labour, but only when incorporated into the building. Loose furnishings, carpets and white goods are not building materials, so they stay standard-rated even on a new build. Materials a homeowner buys directly from a merchant are also standard-rated; the zero rate reaches materials only through the builder's supply.

Other zero-rated buildings

Beyond ordinary homes, zero-rating covers buildings used solely for a relevant residential purpose — children's homes, care homes, hospices, student accommodation, school boarding houses, armed forces accommodation and monasteries — and buildings used by charities for a relevant charitable purpose, such as a village hall. The customer must give the builder a certificate confirming the qualifying use, and at least 95% of the building must be used for that purpose. The first sale or long lease of a qualifying building by the person who constructed it is also zero-rated.

Conversions and empty homes at 5%

The reduced rate of 5% covers three main situations under Notice 708:

1. Converting a non-residential building into dwellings — for example, turning a barn, office or shop into flats, or into a building for a relevant residential purpose.
2. Changing the number of dwellings — splitting one house into flats, or merging flats back into a single house.
3. Renovating a dwelling that has not been lived in for at least two years before the work starts.

The two-year rule is evidence-based: the builder needs proof the property was empty, such as council tax records, electoral roll records or a letter from the local authority's empty homes officer. Occasional use as a second home during the two years breaks the condition. The customer gives the builder a certificate confirming eligibility, using the wording in Notice 708 — without it, the builder should charge 20%.

Worked example — the 5% saving. A builder renovates a house empty since 2023 for a net price of £60,000. At 5%, the VAT is £3,000 and the client pays £63,000. At the standard rate the VAT would be £12,000 and the bill £72,000 — a £9,000 saving for getting the certificate and vacancy evidence right before work starts.

A related route exists for buildings empty for ten years or more: a person converting such a building into a dwelling may be able to reclaim VAT through the DIY housebuilders scheme (form 431C) rather than through a reduced rate on the builder's invoice. Do not assume both routes apply to the same project.

Repairs, extensions and commercial work at 20%

Everything that does not qualify for 0% or 5% is standard-rated. That includes the bulk of everyday building work:

• Repairs and maintenance to existing homes — a new roof, rewiring, a replacement kitchen or bathroom in an occupied house.
• Extensions to existing dwellings that do not create a separate, self-contained home.
• Work on commercial buildings, including construction, refurbishment and fit-out.
• Garden rooms, detached garages and similar structures built after a dwelling is complete.

Note the trap in the second bullet: extending a house to add bedrooms is standard-rated, but extending it to create a genuinely new, self-contained flat can be zero-rated. The work may look similar; the VAT answer turns entirely on whether a new dwelling results.

For commercial property, the sale of a new non-residential building (less than three years old) is generally standard-rated, while sales and leases of older commercial buildings are normally exempt — unless the owner has opted to tax. Our commercial rent guide covers the option to tax.

Energy-saving materials: 0% until 31 March 2027

Installing qualifying energy-saving materials in residential accommodation is currently zero-rated in Great Britain (from 1 April 2022, and in Northern Ireland from 1 May 2023) — but only until 31 March 2027, after which the rate reverts to 5% under current law. The relief covers the supply and installation together: insulation, solar panels, heat pumps, battery storage and heating controls, among the products listed in Notice 708/6. Crucially, the installer must supply and install the product — buying the same equipment over the counter without installation is standard-rated.

Worked example — the deadline effect. A heat pump installation priced at £8,000 net costs the homeowner £8,000 if installed by 31 March 2027. From 1 April 2027, at 5%, the same job costs £8,400 — a £400 difference for timing alone. If a project straddles the date, the tax point (usually the invoice or payment date, whichever is earlier) decides the rate, so agree invoicing dates in advance.

Mobility aids and certain heating and security work for people over 60 are reduced-rated at 5%, and alterations for disabled people in their own homes — ramps, widened doorways, adapted bathrooms and lifts — can be zero-rated with a signed eligibility declaration.

The domestic reverse charge: who accounts for the VAT

Since 1 March 2021, most construction supplies between VAT-registered businesses work backwards. Under the domestic reverse charge (VAT Act 1994, section 55A), the supplier invoices without VAT and the customer accounts for the VAT on both sides of its own return. It was introduced to stop missing-trader fraud in construction supply chains, and it sits alongside — not instead of — the Construction Industry Scheme (CIS).

The reverse charge applies only when all of these conditions are met:

• Both supplier and customer are VAT-registered in the UK.
• The payment is reportable under CIS.
• The supply is standard-rated (20%) or reduced-rated (5%) — zero-rated and exempt supplies are excluded.
• The customer has not given written confirmation that it is an end user or intermediary supplier.

An end user is a VAT- and CIS-registered business that does not make onward supplies of the services it receives — typically a developer. End users must tell suppliers in writing; without that statement, the supplier must apply the reverse charge. A private homeowner is never in the reverse charge, because they are not VAT-registered.

There is also a 5% disregard: if the reverse-charge element is 5% or less of the whole supply value, and both parties agree at the start of the contract, normal VAT rules can apply to the whole supply. The 5% is measured on the contract value, not invoice by invoice.

Worked example — subcontractor to contractor. A VAT-registered bricklaying subcontractor does £20,000 of standard-rated work for a VAT-registered main contractor. Under the reverse charge the subcontractor invoices £20,000 with no VAT added, stating "Reverse charge: VAT Act 1994 Section 55A applies". The main contractor accounts for £4,000 of output VAT in Box 1 and reclaims the same £4,000 as input VAT in Box 4, with £20,000 in Box 7 — net nil if its input VAT is fully recoverable. Cash flow still changes: the subcontractor never holds the £4,000.

Getting this wrong is expensive in both directions. A supplier that charges VAT where the reverse charge applies leaves its customer unable to reclaim it normally; a supplier that omits VAT where normal rules apply underpays HMRC. State the VAT treatment in the contract, and file the end-user statement with the project records. Our reverse charge guide works through the box-by-box treatment.

CIS deductions are not VAT

Do not confuse the reverse charge with CIS deductions. Under CIS, a contractor deducts a percentage from payments to subcontractors — 20% for registered subcontractors, 30% for unregistered ones — and pays it to HMRC on the subcontractor's behalf. That deduction is on account of the subcontractor's income tax and National Insurance, not VAT, and it is calculated on the payment excluding VAT (materials costs can also be excluded where evidenced). A single subcontractor invoice can therefore carry both treatments at once: a CIS deduction from the payment, and reverse-charge VAT accounted for by the contractor.

Registration, invoicing and records

The £90,000 VAT registration threshold applies to construction businesses like any other: taxable turnover — including zero-rated work — over £90,000 in a rolling 12 months requires registration, while exempt supplies do not count. A small builder under the threshold does not charge VAT at all, and cannot use the reverse charge, since that requires both parties to be VAT-registered.

Invoices must show the VAT treatment clearly: the rate charged or, for reverse-charge supplies, the reverse-charge statement and the VAT the customer must account for. Standard invoice requirements still apply, and records must be kept for six years. For reduced- and zero-rated work, keep the evidence that justified the rate: the customer's certificate, vacancy evidence, planning permission and, for end users, the end-user statement. HMRC can assess for the VAT difference years later if the evidence is missing, and the builder — not the customer — charged the wrong rate.

Use our VAT calculator to check the VAT on any construction quote.

Common mistakes on construction VAT

1. Charging 20% on a genuine new build, or 0% on an annexe that cannot be sold separately — the self-contained-dwelling test decides.
2. Applying 5% to a renovation without vacancy evidence or a customer certificate — the relief is conditional, not automatic.
3. Treating a house extension as zero-rated because it adds a kitchen and bathroom — it is standard-rated unless it creates a new dwelling.
4. Forgetting the reverse charge on subcontractor invoices, or applying it to zero-rated new-build work.
5. Accepting an end-user claim verbally — only a written statement removes the reverse charge.
6. Mixing CIS deductions with VAT — the deduction comes off the payment excluding VAT.
7. Pricing energy-saving installations at 0% without checking the date against the 31 March 2027 end of the relief.
8. Throwing away certificates and vacancy evidence — without them, a reduced or zero rate cannot be defended on enquiry.

Frequently asked questions

Educational information and estimates. These tools do not submit VAT returns or determine the treatment of a specific transaction.