VAT on construction. Reverse charge mechanism.

VAT on construction

The VAT legislation relating to the construction sector is complex and can be difficult to understand if you are not experienced in VAT matters. Incorrectly interpreting the relevant VAT regulations and guidance can lead to either an underpayment or overpayment of VAT. Our VAT specialists are here to help you meet your obligations. We have many years of experience in managing VAT on construction and in the property development sector. We recognise the complexity of the VAT regulations in this industry, such as a variety of VAT rates and the conditions attached to these different VAT rates. We are conscious of the application of systems such as the construction industry reverse charge. With our VAT expertise we’ will ensure that VAT compliance is a part of all your business systems.

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VAT on construction services – the reverse charge

The reverse charge mechanism, which applies to specific construction services, requires VAT registered businesses, that provide qualifying construction services to a VAT registered customer for onward sale, to specify that the supplies are subject to the reverse charge procedure on invoices issued with the customer self-accounting for VAT on its own VAT return which can then be recovered as input tax subject to the normal rules. This is particularly relevant when considering VAT on construction and can be complex to navigate without VAT expert advice.

Rates of VAT

The UK’s VAT system includes a number of different rates and the application of these rates in the area of VAT on construction depends on the nature of the work and the type of property involved.

The standard rate of VAT is 20% for most goods and services, including many aspects of VAT on construction and this rate typically applies to the cost of construction services and materials for most standard non-residential building projects.

The reduced rate of VAT is 5% and a number of types of construction work qualify for this reduced rate. This work includes certain residential conversion projects, the renovation and alteration of certain residential properties that have been empty for more than two years, and the installation of energy-saving products. Understanding VAT on construction specifically when the reduced rate applies can significantly impact the overall cost of a project whilst at the same time should be approached with caution.

Zero-rated VAT applies to specific construction activities, notably the construction of new homes and certain new residential and charitable buildings. This zero rate means that the builder does not charge VAT on these construction services, but can still reclaim VAT on their expenses subject to the normal rules. This rate is particularly relevant for new housing developments and can influence the affordability and pricing of new homes.

Each VAT rate has specific criteria and conditions, and it’s important for businesses to correctly identify which VAT rate applies to their construction project to ensure compliance and avoid overcharging or undercharging VAT.

VAT on construction errors

Failure to comply with VAT on construction rules can lead to a number of different of consequences. The application of an incorrect VAT rate can lead to an underpayment of VAT, which, due to the high values involved and associated services, can lead to large VAT penalties calculated as a percentage of VAT owed with interest also being charged on VAT owed. Conversely, an overpayment of VAT may impact customers, as they are unable to recover incorrectly charged VAT as input tax.

More information on VAT fines

VAT specialist advice in relation to VAT on construction

The construction industry is fraught with complex VAT rules that can be difficult to interpret. From understanding the reverse charge VAT on construction system to knowing when the reduced 5% VAT rate applies, the position is far from straight forward. The complexities of VAT on construction cannot be understated and this is where professional VAT advice can be essential. Our team of VAT specialists can help you navigate these complexities, ensuring you remain compliant while optimising your tax position.

HMRC’s guidance in relation to VAT on construction can be found at:

https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708

https://www.gov.uk/vat-builders