In the construction industry VAT on building work is commonly applied at the standard rate (20%). However, if you are building a new home then the rate of VAT on the cost of labour and materials can be reduced to 0% (‘zero-rated’).
So what do you need to know?
1. The building must meet HMRC’s requirements for zero-rating
The building must:
- be separate, self-contained and used independently of any other property (so internal doors do not count)
- not be for business purposes (one room to work from home office is fine)
- have the correct planning permission in place
- have the ability to be sold in its own right
2. The building must be a ‘new building’
What is ‘new’ depends on the circumstances and may not be instantly obvious, but if there is an existing building on site then the rule of thumb is that this must be completely demolished to ground level.
3. What about works done before or after the building is completed?
The work must be ‘closely connected’ to the building project. So the work must be part of the same project and carried out close to when the works are done.
4. The type of work that’s done
The work must relate to the construction of the building and any materials used must be ‘incorporated’ into the building.
But it is worth noting that professional consultant’s fees (e.g. architects, quantity surveyors, engineers, etc) and hiring goods will generally have VAT applied at the standard rate.
Finally, some ‘must knows’ about VAT:
- HMRC will not refund you if you have paid VAT in error. So make sure VAT is payable and pay the correct amount first time around.
- If VAT is payable for labour then check the builder is VAT registered. Otherwise, the builder is receiving more money than they are entitled to.
- You are entitled to a VAT refund from HMRC when purchasing materials. So keep VAT receipts and make sure you claim back the VAT within three months of completion of the work otherwise you could lose your right to a refund.
HMRC has some very useful guidance online but if you have any queries about whether VAT can be zero-rated for your project or about VAT in general then email firstname.lastname@example.org.