Construction VAT and the Domestic Reverse Charge
Construction VAT can be 20%, 5%, 0% or subject to the domestic reverse charge depending on the property, the work being carried out and who the customer is.
We advise developers, contractors and property businesses on the correct VAT treatment before invoices are raised, and help correct historic errors where VAT has already been accounted for incorrectly.
How we can help
- Construction VAT rate reviews
- Domestic reverse charge assessments
- End-user and intermediary-supplier reviews
- New-build zero-rating
- Property conversion VAT
- 5% reduced-rate reviews
- Property development input VAT
- Mixed-use developments and apportionment
- Energy-saving materials
- DIY housebuilder claims
- Historic VAT corrections
- HMRC enquiries and assessments
Domestic reverse charge
The construction domestic reverse charge changes who accounts for VAT. Instead of the subcontractor charging VAT, the customer may have to account for it on its own VAT return.
Whether it applies depends on the nature of the work, CIS status, VAT registration and whether the customer is making onward construction supplies.
The area that causes most problems is end-user status. A property developer can be an end user even though construction is central to its business. The answer depends on what it does with the construction services it buys.
We can review the contractual chain and confirm:
- whether the reverse charge applies
- whether the customer is an end user
- whether an intermediary-supplier exemption applies
- what wording should appear on invoices
- what confirmations should be obtained from customers
It is considerably easier to establish this before the first invoice than correct a project afterwards.
New builds and property development
Qualifying construction of a new dwelling can be zero-rated. But “new build” in planning or commercial language does not automatically mean “new dwelling” for VAT.
Existing structures, demolition, planning conditions and the nature of the works can all affect the treatment.
For developers, we can review:
- whether construction qualifies for zero-rating
- VAT recovery on development costs
- blocked input VAT
- professional and construction costs
- mixed residential and commercial schemes
- the VAT treatment of the eventual sale or lease
Certain items incorporated into a new development do not qualify as building materials for VAT purposes. Carpets, most fitted furniture and many appliances are common areas where developer input VAT is incorrectly claimed.
Conversions and the 5% VAT rate
Property conversion work can qualify for the 5% reduced rate rather than 20%. Common examples include:
- converting commercial premises into residential accommodation
- converting one house into several flats
- reducing or changing the number of dwellings
- renovating qualifying residential property that has been empty for at least two years
We review the property before and after the works, the historic use and the supporting evidence before confirming whether the reduced rate is available.
Empty properties
Qualifying renovation and alteration work on residential property that has been unoccupied for the required period may qualify for the 5% rate. The difficulty is often not the rule but the evidence.
We can review:
- council tax information
- electoral roll records
- utility records
- local-authority evidence
- occupation around the start of the works
- different contractors starting at different stages of the project
If the VAT rate depends on an empty-property condition, establish the evidence before HMRC asks for it.
Energy-saving materials
Certain qualifying installations of energy-saving materials currently benefit from a temporary zero rate. This can include qualifying installations such as insulation, solar panels, heat pumps and electrical storage batteries.
The relief is narrower than the marketing description “energy efficient”, so the product and installation need to fall within the VAT rules.
DIY housebuilder VAT claims
We assist individuals building or converting qualifying homes with DIY housebuilder VAT claims. This can include:
- checking whether the project qualifies
- reviewing invoices before submission
- identifying eligible and blocked expenditure
- preparing the VAT calculation
- reviewing completion evidence
- preparing or reviewing the HMRC claim
Do not leave the invoice review until the end of the project.
Correcting construction VAT errors
We also review completed projects where the VAT treatment may have been wrong. Typical problems include:
- 20% charged where 5% was available
- Reverse charge missed
- Reverse charge applied to an end user
- New-build work incorrectly zero-rated
- Blocked developer input VAT claimed
- VAT treatment changing between contractors on the same project
Depending on the circumstances, the correction may involve credit notes, replacement invoices, VAT-return adjustments or disclosure to HMRC.
Where one error is identified, we normally recommend reviewing similar projects from the same period rather than correcting the single transaction in isolation.
Who we work with
- Property developers
- Main contractors
- Subcontractors
- Property investors
- Landlords undertaking substantial works
- Architects and project managers
- Businesses converting commercial property
- Individuals undertaking qualifying self-build projects
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