Ask anyone in construction what keeps projects from running smoothly, and you’ll probably hear about planning delays, supply issues or the British weather. But on top of all of that, contractors, subcontractors and property businesses have got VAT to contend with!

With different rates for new builds, renovations, conversions and even DIY projects, it’s easy to get lost in the detail. That’s why HMRC created VAT Notice 708 - the rulebook for how VAT applies in the building and construction world. 

VAT Notice 708 is HMRC’s official guidance on how VAT applies to building and construction services in the UK. If you’re a contractor, subcontractor, property developer or even a charity commissioning building work, this notice is your go-to reference.

In this article, we’ll break down the key rules in VAT Notice 708, highlight where different VAT rates apply, and explain what you need to watch out for when it comes to compliance.

What is VAT Notice 708?

VAT Notice 708 is HMRC’s detailed guide on how VAT should be applied to supplies of building and construction services, materials and related work.

It covers:

• When construction services are standard-rated, reduced-rated or zero-rated.
• The difference between new builds, renovations, and conversions.
• How VAT works for housing associations, charities, and other non-profits.
• Special cases like listed buildings and DIY housebuilding projects.

The full notice runs into dozens of pages, but you don’t need to memorise every word. The key is knowing how to identify which rate applies to the work you’re doing.

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VAT rates in construction: the basics

There are three possible VAT outcomes for building and construction services:

1. Standard rate (20%): This is the default rate and applies unless specific rules say otherwise.
2. Reduced rate (5%): Applies to certain residential renovations and specific conversion projects.
3. Zero rate (0%): Applies to qualifying new builds and certain charitable building projects.

Let’s look at each in more detail:

Zero-rated construction work

Zero rating only applies in very specific cases:

• New dwellings: Building a brand-new residential property from scratch can be zero-rated, as long as certain conditions are met (e.g. the property must be self-contained, and have its own access and planning permission).
• Charitable buildings: The construction of new buildings for charitable, non-business use (like a hospice or community centre) can qualify for zero rating.
• Certain residential conversions: Converting a non-residential property (e.g. a barn or office) into a home can sometimes be zero-rated. Still, most conversions (e.g. from non-residential to residential) are reduced-rated at 5%, not zero-rated, unless they meet very specific criteria.
• Energy-saving materials installations: In certain situations, when you’re using energy-saving materials (like insulation, solar panels, or heat pumps), that can qualify for zero rating too.

The rules here are strict. If the conditions aren’t fully met, HMRC may decide the work is standard-rated after all, so getting it right matters.

Reduced-rated construction work

Some building services qualify for the reduced 5% rate, including:

• Renovations and alterations of residential properties that have been empty for at least 2 years.
• Conversions of a property to create a different number of dwellings (for example, turning one house into two flats).

Again, eligibility depends on meeting strict conditions, and you’ll need evidence (like council tax records) to prove the property has been vacant for the required period.

Standard-rated construction work

Most construction and building services fall under the 20% standard rate, including:

• Routine repairs and maintenance (like fixing a roof or repainting)
• Extensions to existing residential properties
• Building work on listed buildings
• Work on commercial properties (unless a specific exemption applies)
• Supply of building materials alone (outside of a qualifying supply of services)

Unless you can prove your work qualifies for a reduced or zero rate, always assume the standard rate applies.
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Building materials and VAT Notice 708

VAT Notice 708 also explains the rules around building materials. 

In a nutshell, if you supply building materials as part of a qualifying construction service (e.g. building a new house), the VAT rate that applies to the service also applies to the materials. But if you supply materials on their own (without installation), they’re usually standard-rated at 20%.

Understanding this distinction is essential, especially if you’re invoicing for both labour and materials.
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The DIY housebuilders’ scheme

A special part of VAT Notice 708 covers individuals building their own homes. Under the DIY housebuilders’ scheme, private individuals can reclaim VAT paid on materials and services for constructing a new dwelling for personal use.

Keep in mind that this doesn’t apply to businesses, landlords or developers. It’s only for people building or converting their own home. Applications must be made to HMRC within 3 months of completion, and HMRC are strict on this - they usually reject late claims.
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Common pitfalls under VAT Notice 708

Even experienced builders and developers can get tripped up.

Some of the most common mistakes include:

1. Assuming all residential work is zero-rated: In reality, most repairs and extensions are standard-rated.

2. Not keeping the right evidence: For reduced or zero-rated projects, you need documentary proof (planning permission, council tax records, certificates of charitable use, etc.).

3. Mixing up supplies of materials and services: Supplying materials without installation is treated differently to supplying them as part of a construction service.

4. Forgetting about changes in property use: A project that starts as a commercial-to-residential conversion may qualify for reduced or zero rates, but only if conditions are met and documented.

Why VAT Notice 708 matters

Getting VAT wrong in construction isn’t just a paperwork issue. It can hit your cash flow hard. Charge too much VAT and you risk losing out on contracts, but charge too little and HMRC could demand backdated payments, penalties and interest.

VAT Notice 708 is designed to give clarity, but it’s not always easy to interpret. That’s why many contractors and property developers choose to work with an accountant who specialises in VAT for construction.

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Staying compliant without the stress

If your business falls under the building and construction sector, VAT Notice 708 is essential reading. But you don’t have to tackle it alone.

Here are our top tips for understanding and following the rules of VAT Notice 708:

• Know your project type: Identify whether it’s a new build, conversion, renovation or repair you’re invoicing for.
• Check the VAT rate carefully: Never assume! Always check HMRC’s conditions.
• Keep evidence: From planning documents to certificates, having proof is vital.
• Get expert support: An accountant or professional tax advisor - like one of our friendly team here at Crunch - can not only help you interpret VAT Notice 708 and give you the support you need to do everything by the book, but can also manage your accounting and finances entirely.

Final thoughts

VAT in construction is full of quirks, exceptions and fine print, and VAT Notice 708 is where HMRC sets it all out. While it might not be the most gripping read, understanding the basics could save your business thousands.

If you’re ever unsure which rate applies to your work, it’s always safer to get advice upfront rather than risk a correction (and a penalty) later. At Crunch, we can help contractors, subcontractors and property businesses get VAT right, so you can focus on building, not battling tax rules.

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