VAT in the construction industry is one of the most complicated areas to tackle, with varying levels of VAT applied depending on the nature of work being undertaken. In addition, the construction industry has had around 20 months to establish the reverse charge VAT rules for building projects.
Standard VAT rate
As a general rule, all construction work is taxed at the standard 20% rate unless it qualifies for reduced or zero-rated VAT. Repairs, maintenance and upgrade work by plumbers, plasterers and carpenters is charged at 20% VAT for residential construction.
Reduced VAT rate
A lower rate of 5% VAT is applied to building services and materials used for property renovation of an abandoned private building; for adapting a house into flats or a place of multiple occupancy; or for converting a business building into a residential property. The reduced VAT rate can make a big difference to developers of these challenging properties.
Zero VAT rate
The construction of a building is zero-rated when it fits these criteria:
- Designed as a ‘dwelling’ – a self-contained living space that could be sold separately
- Used only for a ‘relevant residential purpose’ – residential accommodation for children, people with disabilities or elderly people, a hospice
- Used only for a ‘relevant charitable purpose’ – such as a village hall or community organisation
Architectural, surveying and consultancy services aren’t allowed as zero-rated but demolition and site security are. Eligible contractors must hold a zero-rate certificate for relevant supplies.
VAT reverse charge
As we outlined in our blog, January 2021, the reverse charge system came into operation in March 2021, after several postponements. From this time, it became the responsibility of the contractor using subcontractors to declare VAT due as output tax on their VAT return and to reclaim it through reverse charge accounting.
The VAT reverse charge applies to construction, repair, extension, alteration demolition, painting and decorating, heating, lighting, air conditioning, drainage, ventilation and fire protection. The reverse charge doesn’t apply to sales of goods direct to the final customer or those not in construction. Some services such as surveying or architect consultation, ‘zero-rated’ new home construction, hire of machinery (without an operator) and its delivery to site, signage and installation of security systems are also not included in the reverse charge system.
The accounting software packages that we all rely on are now well set up to help construction firms deal with the reverse charge and manage the impact on cash flow while waiting to recover the VAT.
It is always wise to take VAT advice before construction work begins to make sure the correct rates are applied and systems are set up. The friendly, approachable team at CRM has a wealth of experience in VAT for construction and is happy to discuss your requirements on 01865 379272.