VAT is one of those tricky taxes in the construction industry. Unlike many other sectors where the standard rate almost always applies, building and property work is subject to three possible VAT rates: standard (20%), reduced (5%), and zero (0%).

Which rate applies depends on the type of project, the property’s use, and sometimes even its history. Builders, contractors, and property developers who don’t get it right risk lost profits, unhappy clients, and penalties from HMRC.

This guide explains each VAT rate in detail, when they apply, and what evidence you’ll need.

The standard rate (20%)

The standard rate of 20% is the default rate of VAT, and applies to most building and construction services. Unless you can clearly prove that the reduced or zero rate applies, you should assume 20% is correct.

Examples of standard-rated work:

• Renovations or alterations to existing residential buildings.
• Routine repairs and maintenance (e.g. replacing windows, fixing roofs, rewiring).
• Building extensions or conservatories.
• Garden rooms or garages added after a new dwelling has been completed.
• Work carried out on most commercial buildings (shops, offices, warehouses).
• Professional services: architects, surveyors, engineers, project managers.

Practical case:

A builder is hired to replace the kitchen and bathroom in a house that has been occupied for years. This is a standard-rated service, the reduced rate doesn’t apply because the property isn’t empty, and it’s not a new build.

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The reduced rate (5%)

The reduced rate of 5% applies in special situations where the government wants to encourage housing use or energy efficiency. It’s not as widely used as the standard rate, but it can make a big difference to client costs.

Key scenarios where 5% applies:

1. Renovating empty homes
   
   • If a residential property has been empty for at least two years, renovation or conversion work may qualify for the 5% rate.
   • HMRC requires evidence, such as a local authority’s empty property confirmation or council tax records.
     
2. Conversions
   
   • Changing a single dwelling into multiple flats, or multiple flats into a single dwelling.
   • Converting non-residential buildings (e.g. office blocks) into homes may also qualify in certain circumstances.
     
3. Energy-saving improvements
   
   • Installing insulation, solar panels, heat pumps, or qualifying central heating systems in homes.

Note: Rules around energy-saving materials have changed in recent years, for example, Until 31 March 2027 in Great Britain, the installation of qualifying energy-saving materials (insulation, solar panels, heat pumps, certain batteries, etc.) is temporarily zero-rated, not 5%. 

It is important to always check the latest HMRC guidance to keep up to date.

Practical case:

A landlord is converting a three-storey house into three self-contained flats. This is a conversion, so the work may be charged at 5%. However, if the same landlord simply repaints and redecorates the property, that would remain at 20%.

The zero rate (0%)

Zero-rating means you charge no VAT but can still reclaim VAT on related costs. It is highly restricted and depends on both the type of building and the supply..

Main qualifying situations

• New dwellings – Construction of a new house or flat designed for use as a dwelling, meeting HMRC’s tests (separate entrance, full facilities, no legal restriction on separate sale, etc.).
  
  
• Relevant residential buildings – New buildings used solely for residential institutions (care homes, student halls, etc.).
  
  
• Relevant charitable buildings – New buildings to be used solely (generally 95 %+) for a non-business charitable purpose, supported by an HMRC certificate.
  
  
• Associated works and materials – Building materials “ordinarily incorporated” into a qualifying zero-rated building when supplied and installed by the main contractor.
  

Important nuance: Garages or parking spaces built at the same time as the new dwelling and intended for its use can also qualify for zero-rating. Add-on garages or garden rooms built later are normally standard-rated.

Practical case:

A contractor builds a brand-new detached house that meets all HMRC conditions. The main construction is zero-rated. If a detached garage is built later as a separate project, that later work is standard-rated at 20%.

Some common pitfalls to avoid

VAT in construction is complicated, and mistakes are easy to make. Here are some of the most common:

1. Mixed-rate projects
   
   
   • One project may involve multiple VAT rates. For example, a new house (0%) with a detached garage (20%) and renewable energy system (5%). Invoices must separate out each element clearly.
     
2. Evidence requirements
   
   
   • Reduced and zero rating aren’t automatic. HMRC requires proof, such as occupancy certificates, planning permissions, or client certificates. Without this, you must charge 20%.
     
3. Repairs vs improvements
   
   
   • Repairs and like-for-like replacements are usually 20%. But installing an energy-efficient system may qualify for 5%. Distinguishing between the two is vital.
     
4. Commercial conversions
   
   
   • Turning an office into flats may be 5% or 0% depending on details. Misunderstanding the rules could lead to undercharging VAT and leaving you liable for the difference.

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Why VAT rates matter for contractors and clients

Charging the correct VAT rate doesn’t just keep you compliant with HMRC,  it can also:

• Win more business: A project that qualifies for zero or reduced VAT is cheaper for clients, making your services more attractive.
• Protect your profit margins: Undercharging VAT leaves you responsible for the shortfall, which can wipe out your profit on a job.
• Avoid disputes: Overcharging VAT can cause client disputes, late payments, and reputational damage.

HMRC guidance

For detailed rules, builders and contractors should refer to VAT Notice 708: Buildings and construction, HMRC’s official guidance. However, the notice runs to over 100 pages and is full of technical language, so professional advice is often essential.

How Crunch can help you

VAT in construction is a highly complex area, and the difference between zero, reduced, and standard rates can often come down to fine details. At Crunch, we help contractors, builders, and property businesses make sense of the rules.

We can:

• Advise you on which VAT rate applies to you.
• Help you gather the right evidence and documentation to stay compliant.
• Set up your accounting system so VAT is applied correctly on invoices.
• Handle VAT returns, so you can focus on building work instead of paperwork.

Plus, via Crunch you can download your free VAT-registered Limited company invoice template, giving you a simple and compliant way to bill clients with the correct VAT rate applied.

If you’re unsure about VAT for your next project, get in touch with Crunch, we’ll help you stay compliant, avoid costly mistakes, and keep your business running smoothly.

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