Understanding construction industry VAT can be complicated, especially when different rates apply depending on the type of building work.
Whether you’re a builder, subcontractor or construction company owner, knowing how much VAT to charge is essential for accurate pricing, invoicing and HMRC compliance.
This guide explains the different VAT rates for construction work, when they apply and how the domestic reverse charge affects contractors and subcontractors.
Quick answer
Most construction work in the UK is subject to 20% VAT, although certain projects qualify for a reduced rate of 5% or a zero rate of 0%. The correct rate depends on the work being undertaken and the building’s intended use. Some construction services are also subject to the domestic reverse charge, which changes who accounts for VAT.
What are the VAT rates in the construction industry?
There are three main VAT rates that apply to construction work in the UK: 20%, 5% and 0%.
While most building services are standard-rated, certain residential projects and other qualifying works benefit from reduced or zero rates.
| VAT rate | When it applies | Example |
| 20% Standard rate | Most construction, repairs, maintenance and building improvements | Building an extension on an existing home |
| 5% Reduced rate | Certain residential conversions and renovations | Renovating a qualifying property that has been empty for at least two years |
| 0% Zero rate | Construction of qualifying new homes and certain other eligible buildings | Building a new residential property that meets HMRC’s conditions |
The table provides a general overview. Individual projects must meet the relevant conditions before a reduced or zero rate can be applied.
Standard-rated construction work (20%)
The standard VAT rate of 20% applies to most building and construction services.
This includes everyday projects such as home extensions, roof repairs, kitchen refurbishments, commercial construction and general maintenance.
For example, if a VAT-registered builder charges £10,000 for a standard-rated home extension, the invoice would normally include an additional £2,000 in VAT, bringing the total to £12,000.
Unless the work qualifies for a specific VAT relief, 20% is generally the starting point for construction services.
Reduced-rated construction work (5%)
Certain residential building projects qualify for the reduced VAT rate of 5%.
Examples include:
- Renovating or altering residential properties that have been empty for at least two years, provided the qualifying conditions are met.
- Converting a non-residential building, such as an office, into qualifying residential accommodation.
- Certain residential conversions that change the number of dwellings within a property.
However, reduced VAT does not automatically apply to every renovation or conversion. Eligibility depends on the property’s circumstances, the work being completed and HMRC’s conditions.
Zero-rated construction work (0%)
Some construction work qualifies for zero-rated VAT, meaning the contractor charges VAT at 0% rather than 20%.
The most common example is the construction of a qualifying new home.
Zero-rating can also apply to certain buildings intended for relevant residential or charitable purposes, as well as particular qualifying construction services.
The rules are specific, and not every service connected with a new building is necessarily zero-rated. For example, professional services provided by architects and surveyors are generally standard-rated when supplied separately.
Contractors should establish whether their work qualifies before applying the zero rate.
For detailed eligibility requirements, refer to HMRC’s Buildings and Construction VAT Notice 708.
How does VAT apply to different types of building work?
Two construction projects may involve similar work but attract different VAT rates because of how the building will be used.
For example, constructing a new home may qualify for zero-rating, while extending an existing home will normally attract 20% VAT.
The following examples illustrate some common situations.
| Type of building work | Typical VAT treatment |
| Construction of a qualifying new home | 0% |
| Building an extension on an existing home | 20% |
| General household repairs and maintenance | 20% |
| Construction of ordinary commercial premises | 20% |
| Qualifying residential conversion | 5% |
| Qualifying renovation of a home empty for at least two years | 5% |
| Installation of qualifying energy-saving materials in residential accommodation | 0% until 31 March 2027 |
These are typical treatments rather than universal rules. Some projects include different types of supplies, and additional conditions or exceptions may apply.
What about energy-saving improvements?
Certain energy-saving installations benefit from temporary VAT relief.
Until 31 March 2027, qualifying installations of materials such as solar panels, insulation and heat pumps in residential accommodation can be zero-rated.
The relief applies to eligible installations, not necessarily to materials purchased separately.
Further information is available in HMRC’s guidance on energy-saving materials.
Do builders charge VAT on labour and materials?
VAT-registered builders generally charge VAT on both labour and materials, unless the work qualifies for a reduced or zero rate or is subject to a different accounting treatment, such as the domestic reverse charge.
Where a contractor supplies and installs building materials as part of a single construction service, those materials will often follow the VAT treatment of the building work, provided they qualify as building materials under HMRC’s rules.
For example, a builder constructing a qualifying new home may be able to zero-rate both the construction labour and eligible materials supplied as part of that work.
However, purchasing materials separately from a building supplier will generally attract VAT at the normal rate.
For labour-only subcontractors, the domestic reverse charge may also affect how VAT is accounted for, depending on the circumstances.
How does the construction industry VAT reverse charge work?
The domestic VAT reverse charge changes how VAT is accounted for between certain construction businesses.
Under normal VAT rules, a supplier charges VAT to their customer, collects it and accounts for it to HMRC.
Under the reverse charge, the supplier does not collect the VAT. Instead, the customer accounts for the VAT directly on their own VAT return.
Introduced in March 2021, the rules are designed to tackle VAT fraud within construction supply chains.
When does the VAT reverse charge apply?
The reverse charge generally applies where:
- Both the supplier and customer are VAT registered.
- The customer is registered for the Construction Industry Scheme (CIS), and the payment is reportable under CIS.
- The construction services are subject to VAT at 5% or 20%.
- The supplier is not an employment business supplying workers.
- The customer has not provided written confirmation that they are an end user or qualifying intermediary supplier.
The reverse charge does not apply to zero-rated construction services or work supplied directly to private homeowners who are not VAT registered. Eligible business end users can also receive invoices under normal VAT rules when they provide the necessary written notification.
What does this mean for contractors and subcontractors?
Consider a subcontractor completing £1,000 of standard-rated construction work for a VAT-registered main contractor.
Under normal VAT rules, the subcontractor would charge £1,000 plus £200 VAT, making the invoice £1,200.
If the domestic reverse charge applies:
- The subcontractor invoices £1,000 without collecting the £200 VAT.
- The invoice states that the domestic reverse charge applies and identifies the VAT amount or rate.
- The main contractor accounts for £200 of output VAT on its VAT return and may reclaim the corresponding input VAT, subject to the normal recovery rules.
The subcontractor therefore receives £1,000 rather than £1,200, before any applicable CIS deductions.
This can affect cash flow, particularly for subcontractors who previously collected VAT before paying it to HMRC.
Businesses must also ensure their accounting software and invoices correctly record reverse charge transactions.
For a more detailed explanation, see HMRC’s domestic reverse charge technical guide.
VAT registration and the Construction Industry Scheme (CIS)
VAT registration and the Construction Industry Scheme are separate obligations, although both can affect construction businesses.
When must construction businesses register for VAT?
As of October 2026, UK-established businesses generally need to register for VAT when their taxable turnover exceeds £90,000 over a rolling 12-month period, or when they expect to exceed that threshold in the next 30 days alone.
Taxable turnover includes standard-rated, reduced-rated and zero-rated supplies.
Businesses below the threshold can also register voluntarily, which may allow them to reclaim eligible VAT on business purchases.
You can check the latest requirements through HMRC’s VAT registration guidance.
How is CIS different from VAT?
CIS governs how contractors make payments to subcontractors for certain construction work, including any required tax deductions.
VAT, on the other hand, determines how tax is charged and accounted for on goods and services.
A construction business may have responsibilities under both systems, but registering for CIS does not automatically mean it is VAT registered.
Understanding the difference is particularly important when determining whether the domestic reverse charge applies.
Common construction VAT mistakes to avoid
Applying the wrong VAT treatment can lead to inaccurate invoices, unexpected costs and potential HMRC penalties.
Some common mistakes include:
- Applying the wrong VAT rate: Assuming all residential work qualifies for 5% or 0% VAT without checking the eligibility conditions.
- Incorrectly using the reverse charge: Applying it to every subcontractor invoice, regardless of the customer’s status or the type of service.
- Misunderstanding materials: Assuming building materials are automatically zero-rated because they will be used on a new-build project.
- Poor record-keeping: Failing to retain invoices, contracts and supporting evidence for reduced or zero-rated work.
- Overlooking VAT registration: Failing to monitor taxable turnover against the rolling 12-month registration threshold.
Using the correct VAT codes in your accounting software is also important for accurate reporting. If your business uses Sage, our guide to Sage VAT codes explains the most commonly used codes and when they apply.
Checking VAT treatment before agreeing a price or issuing an invoice can prevent problems later.
Where a project includes different types of work or unusual circumstances, professional advice can help establish the correct treatment.
Frequently asked questions about construction industry VAT
Do builders charge VAT if they are not VAT registered?
No. Builders who are not VAT registered must not charge VAT on their invoices. However, they generally cannot reclaim VAT on materials and other business purchases either.
Is VAT charged on house extensions?
Yes. Most extensions to existing residential properties are subject to 20% VAT. Specific reliefs may apply in limited circumstances, such as certain alterations for people with disabilities.
Do subcontractors charge VAT on labour?
VAT-registered subcontractors generally charge VAT on taxable labour unless the domestic reverse charge applies or the work qualifies for another VAT treatment. Labour-only work can fall within the reverse charge rules.
Is VAT charged on building materials?
Most building materials are subject to 20% VAT when purchased separately. However, eligible materials supplied and installed as part of qualifying reduced or zero-rated construction work may receive the same VAT treatment as the installation.
Can construction businesses reclaim VAT on materials and expenses?
VAT-registered construction businesses can generally reclaim VAT on eligible purchases used for making taxable business supplies, subject to HMRC’s normal input VAT rules.
The amount recoverable depends on the nature of the expense and how it is used within the business.
Need help managing construction industry VAT?
Construction VAT rules can be difficult to navigate, particularly for businesses working across different types of projects or managing multiple subcontractors.
At Chapman Robinson & Moore, we support construction businesses with VAT compliance, accounting, and tax obligations, helping them understand their responsibilities and maintain accurate financial records.
Whether you need help applying the correct VAT rate, managing the domestic reverse charge, or preparing VAT returns, our team can provide guidance tailored to your business.
Contact us today to discuss your construction accounting requirements.
