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Building trades: VAT when constructing new houses and flats

If you carry out building or construction work on a building you must normally charge VAT at the standard rate. But some work you do on a new house or flat might be zero-rated - so you won't have to charge VAT on it.

You can only zero-rate your work if certain conditions are met. These relate to different aspects of the work, including:

  • the type of building you're working on
  • what sort of building materials you're supplying to your customer
  • whether the work you do is carried out before or after the building has been finished

It's important to check the position carefully before you zero-rate your work.

This guide will help you understand what you have to do about VAT if you're a builder working on new houses or flats.

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VAT when constructing new houses and flats

Normally building work is standard-rated for VAT purposes. But if you're a builder or similar trade - like a plumber, a plasterer or a carpenter - you may be able to zero-rate the work you do on a new house or flat. If you can zero-rate your work, this applies to both your labour and your materials costs in most cases.

When you build a new house or flat you can only zero-rate your work if certain conditions are met. The conditions relate to:

  • whether the building meets HM Revenue & Customs (HMRC) requirements for zero-rating
  • whether it qualifies as a new building
  • when the work is done
  • the type of work that's done

If the work involves materials being supplied, these also can only be zero-rated if certain conditions are met.

The sections below explain the conditions that have to be met before you can zero-rate your work and materials on new houses and flats.

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What houses or flats qualify for zero-rating?

The new house or flat you're working on will only qualify for zero-rating if it meets all of the following requirements:

  • it's self-contained living accommodation
  • it's separate from any other living accommodation - there aren't any internal doors or connections to other houses or flats
  • it can be used independently of any other property
  • there's proper planning permission in place for the building
  • it can be sold in its own right - it doesn't have to be sold along with any other property

Example

You're working on the building of a 'granny annex'. This isn't a new house or flat because it's an addition to an existing house. The granny annex can only be sold if the main property is also sold. So although it's new living accommodation, it doesn't meet all of the requirements and it's standard-rated for VAT.

More about what qualifies as a new house or flat in VAT Notice 708

What if the building you're working on is only partly a new house or flat?

A new property you're working on might have a mixed use - for example, it might be a shop with a flat above it. Only the work on the new flat is zero-rated. You must charge VAT at the standard rate on the work that you do on the shop.

If you're only working on the zero-rated part of the building then you charge VAT at the zero rate. You charge VAT at the standard rate if you're only working on the standard-rated part. But you'll need to split your charge between the zero-rated part of the property and the standard-rated part if your work relates to both. It's up to you how you decide to split (or 'apportion') your charge between the two - but it must be done fairly.

Example

You're fitting windows to a new property that will include a shop and a flat. You can only zero-rate the value of your work - your labour and materials - on the flat. You must charge VAT at the standard rate on the windows you fit for the shop. You could decide to do this on a time basis for your labour charge and on a cost basis for the windows.

More about separating your charges in VAT Notice 708

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What is a new construction?

You're only considered to be building a new house or flat if it's genuinely new. This means that if there was an existing building on the site it must have been demolished completely to ground level. You can leave any cellars, basements and the slab.

Party walls

If you're building against a wall that's shared with another property - often called a party wall - then there's no need to demolish this wall for the building to count as a new house or flat. But if you're redeveloping two joined terraced houses, you'd need to demolish the party wall that's between them.

Retained facades

The building will still qualify as a new house or flat if you leave a single façade above ground level - or a double façade on a corner site - as long as both of the following apply:

  • this is because of planning consent or similar permission
  • you demolish everything else before you start the building work

Enlarging or extending a building

If you enlarge or extend an existing building the work may also qualify for zero-rating so long as all the conditions are met. For example, you might build a new flat on top of an existing block of flats, or add some new houses to an existing terrace. These would count as new flats or houses and you could zero-rate the work.

Garages

If you build a garage or convert a building into a garage at the same time as a new house or flat is being built then this work also qualifies for zero-rating. But other buildings - like pool houses - wouldn't qualify.

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When does your work have to be done?

You can zero-rate the work you do on the building before it's completed. There's no particular rule to say when a building is completed - it could be when any of these points is reached:

  • the Certificate of Completion is issued - usually by the architect
  • the building is finished according to the approved plans and specifications
  • the building can be lived in
  • the house or flat is sold to a buyer

So long as it's closely connected to the building project, you can also zero-rate work that you do:

  • before construction starts
  • after it's finished

The work must be part of the same construction project and done reasonably close to the time the construction's carried out. So a site being cleared before a construction project was even in place would have to be standard-rated, for example.

Work before a building project starts

You can zero-rate all of the following work:

  • demolishing any existing buildings or structures ready for the new house or flat to be built in their place
  • any work you carry out to provide or improve access to the site so that deliveries can be made
  • ground works - including levelling and drainage work as part of a single project to build new houses or flats
  • clearing the site
  • making the site secure

Snagging after a project is finished

You can't zero-rate work you carry out on the building once it's been completed. The only exception is if your work relates to correcting defects in the original building work. This type of correction work is usually described as 'snagging'.

Example

You are asked to go into a house that's now being lived in to redecorate a room. If this is because the original decorating work that was done when the house was first built is faulty, then you can zero-rate the charge you make for the work. But if the reason for your work is because the new owners don't like the colour of the original paint, then you must charge VAT at the standard rate. This is because the purpose of your work in this situation isn't to correct defects.

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What work can you zero rate?

You can zero-rate the work you do on the building itself - as long as the work relates to its construction. This also applies if you're a sub-contractor who's working for another builder. You can also zero-rate work that is closely connected to the building project.

Work that counts as being closely connected with a building project falls into two categories:

  • work before the project starts so that the construction can be carried out
  • work that allows the building to be used

See the section in this guide on when your work has to be done for more about work done before the project starts.

Work that allows the building to be used

You can zero-rate all of the following work:

  • providing water or power such as gas or electricity - including making connections to the nearest existing supply
  • creating access such as paths, driveways, patios, roads and parking areas
  • making security features such as walls and gates
  • basic soft landscaping - this means putting down top soil and laying grass - but only if this is required by the terms of the planning consent

Hire of goods

If you hire out goods to your customer then you must always charge VAT at the standard rate. But if you supply plant with an operator - like a crane and a driver - then you can zero-rate the charge as long as you meet all the other conditions for zero-rating.

If you hire scaffolding to a customer on its own, then you can't zero-rate your hire charge. But you can zero-rate any charge you make for erecting or dismantling it as long as the other conditions for zero-rating are all met.

Design and build contract

Professionals like architects, designers and surveyors must always standard-rate the services they supply. But if you provide a single 'design and build' contract to a customer for a new house or flat then the whole of what you charge qualifies for zero-rating. A design and build contract means that the architect or designer is working for you and not for your customer.

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What work can't you zero-rate?

You can't zero-rate the following work:

  • on-site catering services
  • landscaping, apart from the minimum that's required by the planning consent
  • constructing external tennis courts and swimming pools - these are always standard-rated for VAT
  • converting a non-residential building into a new flat or house unless you're working for a housing association (although if you're converting a non-residential building like a barn into a house or flat, then you can reduced-rate your work)

Find out which services can't be zero-rated in VAT Notice 708

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What materials can you zero-rate?

You can normally zero-rate the materials you use if you're building a new house or flat that qualifies for zero-rating - but it does depend on what the materials are. There are special rules for what counts as building materials for VAT purposes.

Zero-rating building materials

To be zero-rated, the building materials must meet all of the following conditions:

  • you need tools to fix or remove them
  • they're things that are normally included in a new house or flat - like bathroom taps, kitchen sinks, windows, toilets and shower units
  • they're not finished or prefabricated furniture, or materials to make fitted furniture - but kitchen furniture is allowable
  • they aren't gas or electrical appliances - but heating and hot water appliances, environmental systems, safety and security systems and some other appliances are allowed
  • they aren't carpets or carpeting material - but wood or laminate flooring and linoleum are allowed

Find out what counts as building materials in VAT Notice 708

Items that can't be zero-rated

If you supply materials that don't meet the conditions listed above then you'll need to standard-rate them. These include:

  • cookers - including split-level cookers - unless they're also heating or water-heating appliances
  • white goods like dishwashers, fridges, freezers, washing machines and tumble dryers - even if they're built-in
  • carpets, carpet tiles and underlay
  • wall units like bathroom cabinets
  • wardrobes, unless they're very basic and may then qualify for zero-rating (see below)

Find out which basic wardrobes qualify for zero-rating in VAT Notice 708

Zero-rating of fitting services

If you're fitting or installing materials that qualify for zero-rating in a new house, then you zero-rate your installation services too.

If you're fitting or installing materials that don't qualify for zero-rating - like carpets - in a new house then you can still zero-rate your labour charge as long as you show it separately in your invoice to your customer. You must standard-rate the materials.

Example

If you supply and install a fridge in a new house for an inclusive charge of £100 then you'd have to charge VAT at the standard rate on £100.

But if you charge £80 for the fridge and £20 to install it and you show them separately, then you only charge VAT on the sale of the fridge - £80. You can zero-rate the £20 charge for installing it.

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Selling a house or flat you've built

If you're acting as a developer and you build a new house or flat as a business project, rather than to live in yourself, then you may be able to zero-rate the sale of the property. A zero-rated sale of a new house or flat means you're selling either:

  • the freehold in the building
  • a long lease of more than 21 years (20 years in Scotland)

You can only zero-rate it if you're selling the first freehold or long lease in the building.

If you're making a zero-rated sale as a developer then you may be able to reclaim the VAT you've spent on buying goods and services for the property.

There are certain situations when the sale of your new house or flat may not be zero-rated. Examples of when you'd have to standard rate the sale include:

  • the new house or flat is classed as holiday accommodation
  • the buyer can't live there throughout the year or use it as their main private residence

More about when you can zero-rate the sale of a new house or flat in VAT Notice 708

Reclaiming VAT on the zero-rated sale of a house or flat

If you make a zero-rated sale of a new house or flat, you can't reclaim the VAT on items you've included in the property if they aren't classed as building materials.

You can't reclaim the VAT on building materials unless both of the following conditions are met:

  • you would need tools to fix or remove them
  • they're normally included as a standard item in a new house or flat

Example

A washing machine needs tools to fix it in a building, but it isn't a building material on which VAT can be claimed. It's classed as a white good along with items like fridges, freezers, dishwashers and cookers. VAT can't be reclaimed on white goods.

Check what items are considered to be building materials in VAT Notice 708

What rate of VAT to charge if you can't zero-rate the sale of a house or flat

If you can't zero-rate the sale of the new house or flat you've built:

  • you may have to charge VAT at the standard rate - for example if the building is sold as holiday accommodation - but you may still be able to reclaim the VAT you've paid on work and materials that have gone into the construction of the property
  • your sale may be exempt from VAT - which means in most situations you can't reclaim any VAT you've spent on the building

More about whether the supply of a building is standard-rated or exempt in VAT Notice 708

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