VAT Rates for Construction Work Explained (UK Contractors’ Guide)

Introduction

Understanding which VAT rate applies to construction work is vital. Mistakes can cost you money, invite HMRC scrutiny, and harm client trust. In this guide, we’ll explain when to use 0%, 5%, or 20% VAT—in clear, reader-friendly language, with lots of transition words to guide you.

---

1. VAT Rate Overview

UK VAT has three main rates:

• 0% (Zero-rated): Applies to qualifying new residential builds.
• 5% (Reduced rate): Used for certain renovations and energy-related upgrades.
• 20% (Standard rate): Most other construction activities default to this rate.

---

2. When to Use 0% VAT

Use 0% VAT only when:

• You’re constructing a new dwelling—like a house or flat.
• The building qualifies: it’s designed for residential use and passes HMRC’s criteria with a valid certificate. Saunders Brothers

Note: If you’re converting a building and not fully demolishing first, zero-rating may not apply. GOV.UKAccountancy

---

3. When to Use 5% VAT

The reduced rate of 5% applies if you:

• Renovate a residential property that’s been empty for 2+ years, or
• Install energy-saving measures like insulation or heat pumps.

This lower rate makes projects more affordable—but you must keep evidence like council tax records or planning consent.

---

4. When to Use 20% VAT (Standard Rate)

Use the standard 20% rate for:

• Most rehabilitations, repairs, and extensions
• Work on commercial or mixed-use buildings
• Installations not linked to zero or reduced-rate schemes

---

5. Zero-Rated vs Exempt – Big Difference

Don’t confuse zero-rated with VAT-exempt. With zero-rated, you still charge 0% VAT but can reclaim input tax. With exempt, you don’t charge VAT, but cannot reclaim input tax. This makes zero-rated treatment much more VAT-efficient. Taxually

---

Quick Reference Table

Project Type	VAT Rate
New-build residential (qualifying)	0%
Energy upgrades or long-empty home renovation	5%
Commercial builds, repairs, extensions	20%

---

Learn more

• Learn more about contractor CIS compliance on — CIS for Contractors
• Explore detailed VAT rules in HMRC’s VAT Notice 708 (Construction) for legal clarity.

---

Final Thoughts

Applying the correct VAT rate isn’t just legal—it affects your competitiveness and your client trust. With this guide, you can choose the right rate confidently and include the right details in your quotes and invoices. Ready to ensure you’re VAT‑perfect? Book a VAT review focused on your construction projects.