All You Need to Know About VAT for Builders

All You Need to Know About VAT for Builders

For many people, VAT (value-added tax) is a logistical nightmare. It is levied at the point of sale by companies on products or services, and since it is a consumption tax, it is paid by the end-user instead of the entity selling the items. It can be complicated, tedious, and time-intensive, and if you don’t get it right, you may end up incurring substantial costs.

What is VAT?

VAT, or value-added tax, in the UK is a business tax that is imposed by the government and applies to the sales of goods and services in the country. In the UK, whether or not a corporation needs to legally enrol for VAT depends on its annual revenue and the kind of products it sells.

Companies with annual revenue greater than the existing VAT threshold (£85,000 in 2020/21) are expected to enrol for VAT and submit a VAT return.  For every product that you assign value to, tax needs to be collected when it is sold. This is the consumption tax known as VAT.

In other words, VAT is the tax payable on products/services purchased by individuals and corporations.  It is an indirect tax, which means that companies obtain it on behalf of the government; they do this by charging for their goods and services a VAT fee and then transferring to HMRC the VAT obtained. VAT applies to many different sectors, including the construction industry. If you happen to be a builder, then you would want to know when you are required to charge and collect value-added tax (VAT) on behalf of the UK government.

VAT in the Construction Industry

A glance at legal cases worldwide involving VAT issues will confirm that some of the most commonly heard issues are those related to VAT application in the construction industry. This is mainly because most builders don’t make an effort to properly understand the VAT they need to charge for the different types of work.

For example, VAT is paid at the regular rate of 20 per cent for most work on flats and houses by builders and related businesses such as carpenters, plasterers, and plumbers. However, there are several exceptions that many builders miss. For instance, zero-rate VAT applies to certain types of works provided it meets certain conditions, such as performing renovation work on a property owned by a disabled person or building a new flat or house. The following are some important and frequently asked questions related to VAT for builders and their answers.

Does VAT apply to All Builders?

No, it does not apply to all builders. As a builder, you will be required to charge VAT on the work you do only if your company is a VAT-registered entity. However, it will be mandatory for you to register if your VAT-able turnover for 12 months is more than the minimum threshold—(£85,000 in 2020/21).

Is VAT Applicable on Construction Supplies?

Most supplies are ‘standard-rated’ in the construction industry, so VAT is added to the value of supplies at the existing VAT rate. Some forms of work, however, may often be billed or at a zero rate at a lowered rate of 5%.

What are Considerations for Calculating VAT for Builders?

For anyone intending to perform some kind of construction/property development job, VAT must be appropriately accounted for when determining the budget for the work. The following are the most important considerations for calculating VAT for builders:

  • Is the work being undertaken zero-rated or VAT exempted?
  • Will you be able to collect the VAT?
  • Are quoted rates inclusive or exclusive?

It’s necessary to charge the correct VAT rate if you operate a VAT-registered construction company. The discounted or zero rates will usually only be paid if certain requirements are met. If you believe either rate applies, you can ensure this by checking the specifics.

Zero Rated VAT

The Value Added Tax (VAT) system is a significant part of many economies, and it’s crucial to understand its different aspects, one of which is the Zero Rated VAT. Zero Rated VAT refers to certain goods and services that are taxable but have a VAT rate of 0%. This means that while these goods and services are still within the VAT system, no VAT is charged on their sale.

This is different from exempt goods or services, which are outside the VAT system altogether. The key advantage of zero rating over exemption is that businesses can reclaim any VAT they have paid on costs incurred in making zero-rated supplies. Examples of zero-rated goods and services vary by country, but often include essential items like food, children’s clothing, books, and newspapers.

In the UK, for instance, most food items, children’s clothes, and new build homes are zero-rated. This approach is designed to reduce the cost of living and support industries that are considered essential. However, the rules around what is and isn’t zero-rated can be complex and subject to change, so it’s always a good idea to check the latest regulations or seek professional advice.

What Qualifies for a Lowered or Zero-Rate VAT?

The conditions for a lowered or zero-rate tax are related to various aspects of the work being undertaken, including:

  • The type of structure you’re working on
  • Who you are performing the construction work for
  • The timing of the work
  • The type of work you’re performing and the equipment you install

The following are some of the work that qualifies for a lowered or zero-rate VAT.

Types of Work VAT Rate
Building a new flat or house Zero
Changing a building into a flat or a house Lowered rate
Redoing an abandoned flat or house or modifying it Lowered rate
Procuring and installing elderly mobility aids Lowered rate
Procuring and installing those products and facilities that save energy Lowered rate
Procuring and installing, when covered by a grant, specific security equipment, and heating systems Lowered rate
Linking or hooking up to the main supply of gas—first-time links and grant-covered connections or reconnections Can often be zero or lowered rate
Sourcing or installing items for a disabled person in their house Zero
Make changes to accommodate a person with a disability Zero
Turning a housing complex into a different residential use—such as merging two cottages into one property Lowered rate


Any building work on a normal house or flat not specified in the above table is always accounted for at the existing VAT rate.

New Changes to VAT in the Construction Industry

A domestic reverse VAT fee will become applicable from March 2021 to combat irregularities in the construction industry. No one in the development cycle will charge VAT on their materials from March 2021 onwards until they have entered into a contract with the final buyer and user of the building being constructed. If they are solely a subcontractor hired by the main contractor who deals with the end-user of the building, they will handle the VAT as if it was charged on the materials they receive and as if their contractor had paid it, but no real money will be transferred.

Final Word

All builders in the UK need to find out whether they are required by HMRC to charge VAT on supplies and the construction work performed. Once this is established, the next most important thing to know is what rate applies to the construction work you’re undertaking. With this information, you can make construction more affordable for your customers, which will indirectly benefit you—the builder.

How Q Accountants Can Help Builders with VAT Registration

Navigating the complexities of VAT registration can be challenging for builders. But you don’t have to do it alone. At Q Accountants, our team of experts will guide you through every step of the process, ensuring you meet all requirements and avoid potential pitfalls.

Don’t let VAT registration slow down your business. Contact us today and let us handle the details so you can focus on what you do best – building.

Ready to get started? Book a discovery call with us today. Let’s build a better future for your business together.

Builders and VAT FAQs

Do builders charge VAT on labour?

No, builders do not charge VAT on labour. In the UK, VAT is typically only applied to the materials and goods that are purchased for the construction project. Labour charges are exempt from VAT.

Do builders pay VAT on materials?

Yes, builders typically have to pay VAT (Value Added Tax) on materials used in construction projects. The exact amount of VAT depends on the applicable tax rates and regulations in the specific country or region. Builders usually pass on these costs to their clients or factor them into their project budgets.

Can builders claim VAT back?

Yes, builders can claim VAT back on eligible expenses incurred during their construction projects. However, there are certain criteria and requirements that need to be met in order to be eligible for VAT reclaims.

Builders need to keep proper records and invoices of their expenses, ensure that the goods and services they purchased qualify for VAT reclaims, and follow the necessary procedures for submitting VAT refund claims.

It’s always recommended to consult with a tax advisor or accountant to ensure compliance with VAT regulations and to maximise the potential VAT reclaims.

What are the new VAT rules for construction?

The new VAT rules for construction vary depending on the country and jurisdiction. It is important to research and understand the specific regulations in your location.

However, some common changes in VAT rules for construction include implementing a reverse-charge mechanism, where the recipient of the service becomes responsible for accounting for VAT instead of the supplier.

How long can you claim VAT on new build?

In most countries, businesses can claim VAT on new builds if they are registered for VAT and the property is used for business purposes. The time frame for claiming VAT on new builds can vary depending on the specific regulations of each country.

In some cases, businesses may be able to claim VAT immediately after the completion of the construction project, while in others, there may be a specific time limit, such as within three months of completion.

It is important for businesses to consult with local tax authorities or seek professional advice to understand the specific rules and regulations regarding VAT claims on new builds in their respective countries.