VAT on Construction Industry

Value Added Tax (VAT) is an important consideration for construction companies. While most construction services and materials are subject to the usual VAT rate of 20%, some exemptions allow for lower rates or even zero ratings.

VAT Basics

If a construction company’s taxable turnover reaches the registration threshold, it must register for VAT. The registration threshold in the UK is £85,000 in annual taxable turnover. Businesses can also voluntarily register for VAT, even if their turnover falls below the threshold. Voluntary registration can have its benefits, such as being able to reclaim VAT on purchases. These companies charge VAT at 20% on most of their taxable goods and services. The standard rate is not without exceptions, with certain goods and situations qualifying for zero or lower VAT rates. It makes specific items more affordable and benefits a variety of businesses. Here are some examples:

• Zero-rated Goods: Certain goods are zero-rated, meaning no VAT is charged. Examples include food, children’s clothing, and prescription medications. In the same way, newspapers and books are VAT free, so customers can buy reading materials without having to pay VAT. Also, motorbike helmets, which are important for safety on the road, are not taxed, which makes them cheaper for users. Also, items shipped outside the UK or EU are qualified for zero-rated VAT, encouraging international trade and making exporting companies more competitive.
• Reduced Rates: Some goods and services are eligible for lower VAT rates than the normal rate. For example, products that save energy, like solar panels or insulation, are priced lower to encourage people to use them and support sustainability. The lower rate also applies to renovations on homes that have been empty for more than two years, as well as the installation of mobility aids for use in homes.
• VAT Exemptions: Certain goods and services are exempt from VAT altogether. It means no VAT is charged, and businesses cannot reclaim the VAT they paid on related purchases. VAT-exempt items include educational services, healthcare services provided by doctors and dentists, and insurance services.

Businesses must correctly sort out the VAT rate that applies to their goods or services to be confident that they follow HMRC rules. Using the wrong VAT rates can lead to fines and other problems. Seeking professional advice from our tax experts and utilizing digital tools can help your business manage the difficulties of VAT calculations and ensure accurate filing.

VAT schemes: The UK has many VAT schemes that construction businesses may find useful. These schemes help keep track of VAT and cash flow easier. Here are a few important plans:

1. Flat Rate Scheme (FRS): The FRS allows eligible businesses to pay a fixed percentage of their gross turnover as VAT. It simplifies the VAT calculations and reduces administrative burdens. However, businesses using the FRS cannot reclaim VAT on most purchases.
2. Construction Industry Scheme (CIS): The Construction Industry Scheme (CIS) is a VAT scheme designed for contractors and subcontractors in the construction industry. The CIS aims to regulate subcontractor payments and ensure proper tax compliance. Under the CIS, contractors are required to register for the scheme and deduct a percentage (either 20% or 30%) from payments made to subcontractors. This deduction is an advance payment towards the subcontractor’s tax and National Insurance contributions. The deducted amount is paid directly to HM Revenue and Customs (HMRC). The CIS primarily focuses on managing construction industry tax obligations and ensuring proper reporting and compliance. Contractors are responsible for verifying the tax status of subcontractors and providing them with a statement showing the deductions made. Subcontractors can offset the deductions against their tax liability.
3. VAT Reverse Charge for Construction Services: The VAT Reverse Charge for Construction Services is a scheme for companies that offer construction and building services. As a way to stop theft, it was put in place in the UK in March 2021. Under the Reverse Charge scheme, the person who gets the building services is the one who is responsible for paying the VAT. It means the customer getting the services must report and pay the VAT straight to HMRC instead of the supplier charging and collecting VAT. The Reverse Charge applies to supplies of specified construction services between VAT-registered businesses within the construction sector. Its goal is to stop traders from making false VAT claims or not paying their VAT. The plan affects many kinds of construction work, such as building, repairing, demolishing, installing, and maintaining. However, it does not apply to supplies made to end consumers or those that fall under the reduced or zero-rate VAT scope.

VAT Notice 708

VAT Notice 708 is a policy specifically designed for the construction industry. It lets certain building projects apply for a lower VAT rate of 5% or even 0% instead of the normal 20% rate. It is helpful for property owners who can’t claim input tax because it helps them save on building costs. The policy applies to qualified building materials and services, such as conversions, renovations, maintenance and repairs, and a property’s first sale or long lease.

It is important to determine which projects qualify for the VAT Notice 708 policy to comply with it and take advantage of these savings. Here are some examples:

Conversion Projects: Let’s say a builder is turning a business building into apartments. If the project meets the criteria in VAT Notice 708, such as being used for household purposes, the builder can charge a lower rate or no VAT rate on the building services and materials used. It can help the owner of the building save a lot of money.

Renovation and Repair Works: Consider a developer undertaking renovation and repair works on an existing property. If these works meet the conditions set out in VAT Notice 708, like being connected to a qualified building, the developer can use the reduced or zero VAT rate on the construction services and goods involved. It can help the owner of the building spend less generally.

Sale of New Dwellings: When a developer builds a new home to sell, they may be able to pay a lower or no VAT rate on the services and products used in the building process. It can make the recently built home more appealing to potential buyers since the lower VAT rate lowers the total cost of buying or selling the property.

Types of Qualifying Buildings

VAT Notice 708 provides specific criteria for different types of qualifying buildings, each with its eligibility requirements. Let’s explore these types of qualifying buildings along with some examples:

1. New Building Construction: A newly constructed building that meets specified criteria qualifies for this category. It is meant for appropriate residential or charity uses or is designed as a residence. Existing structures must be fully destroyed (except preserved facades) to qualify. This category might include, for example, the construction of a new residential home or a specifically designed care facility.
2. Retained Facade: In the case of this particular category of eligible building, a brand-new construction project will use a single facade taken from an already-existing structure. The pre-existing structure is completely taken down, except for the facade, which is kept because it is a requirement of the statutory planning permit. An example of this would be the construction of a modern office building that kept the original front face of the structure, so maintaining the architectural heritage.
3. Shared Wall Construction: In this group, newly built buildings that share a wall with an old building are eligible. In this case, no internal access exists between the two structures. These buildings are either apartments or serve other residential or charity needs. For example, this group would include a row of townhouses built next to an existing residential building.
4. Enlarged or Extended Existing Building: This type of qualified building includes an extension of an existing building or making it bigger, creating more places to live. The addition or expansion is made to an existing property or multiple dwellings. One example would be extending an existing house to make more self-contained flats.
5. Annexe to an Existing Building: Qualifying buildings in this category refer to constructing an annexe that serves a relevant charitable purpose or is built in conjunction with a dwelling. An example would be constructing an annexe for a community centre or a separate living space for an elderly family member adjacent to an existing house.
6. Garage Construction: This form of qualifying structure includes the construction of a garage attached to single or multiple dwellings. For example, building a garage for residential units within an apartment complex would fall under this category.
7. Multiple Buildings on the Same Site: In this group, “qualifying buildings” mean that more than one building is constructed simultaneously in the same location. These buildings are meant to be used only as a single block for residential reasons. One example would be a group of apartment buildings built together to make a single residential community.

These examples show the wide variety of structures that might qualify for VAT Notice 708 exemption. Certain requirements must be met for each type to get the lower or zero VAT rate. Builders, developers, and property owners need to know about these different types of qualified buildings to determine if they qualify under VAT Notice 708 and follow the policy.

Compliance and Consideration

Correct records are necessary to take advantage of reduced or zero-rated products. Property owners and builders must keep the right paperwork, such as licences, bills, and records of payments. These records show you are eligible for a lower or no VAT rate. For example, property owners should keep their eligibility certificates, invoices, and payment records for the building services and materials used in their qualifying residence conversion projects.

Construction businesses need to know the rules and requirements of these VAT schemes because they can greatly impact how VAT is managed in the sector. They also need to understand the different types of buildings, the registration requirements for each type, and any other requirements for compliance. For example, a builder working on a repair project should make sure that the materials used meet the requirements for lower VAT rates, such as being normally part of the building.

It is strongly recommended to seek professional help from our team of tax professionals with experience in construction VAT. Our professionals have an extensive understanding of the VAT requirements and can offer helpful advice on achieving compliance and potential cost reductions. They can guide property owners and builders through the complexity of VAT rules and ensure the appropriate VAT rates are applied. For instance, a property owner may seek the advice of our tax specialist to ascertain whether or not their proposed conversion qualifies for the lower VAT rate and to receive direction concerning the appropriate documents and compliance requirements. If you need help with Tax Planning or Tax Compliance; we have tax experts who can help you. Call our office to discuss your circumstances.