VAT on Construction Projects – When It’s 0%, 5% or 20% (and How to Avoid Expensive Mistakes)
VAT in construction is a minefield…
Which is why so many builders get caught out, undercharge, overcharge or trigger HMRC penalties they didn’t see coming. The rules change depending on the type of work, who you’re working for, and even the age and use of the building.ad hurt, you aren’t alone.
Here’s a simple breakdown to help you understand what VAT rate to charge.
When VAT is 20% (standard rate)
✔ Most commercial building work
✔ New extensions & structural alterations to existing buildings
✔ Supply & installation of materials
✔ Professional fees (architects, surveyors etc.)
If you’re quoting a job and you’re not sure, always assume 20% unless the work meets reduced/zero rate criteria. HMRC rarely sympathises with “I thought it was 5%.
When VAT is 5% (reduced rate)
This one catches people out.
5% applies to:
Residential renovations where materials + labour qualify
Conversions (e.g. commercial → residential)
Works to dwellings lived in for 2+ years
Energy-saving improvements in homes
It’s not automatic. You need evidence + correct invoicing to support the reduced rate.
When VAT is 0% (zero-rated)
The golden category… but only in specific cases:
New build residential homes (from ground up)
Charitable building use in some circumstances
Some international construction services
Zero-rated doesn’t mean no paperwork. You still need proper VAT invoices.
Common VAT Mistakes in Construction
Charging 20% on a project that qualifies for 5%
Charging 0% on a project that isn’t new build
Not keeping evidence to justify reduced rates
Claiming VAT on materials used in zero-rated projects incorrectly
Each mistake = lost cash or HMRC risk. Neither is fun.
How to avoid problems
Get written clarification before quoting
Keep detailed project notes & evidence
Use digital bookkeeping to track VAT correctly
Review VAT treatment regularly on ongoing projects
In need of VAT help?
If you want a VAT review for your next project before you quote, book a call. A 10 minute check today can prevent a four figure headache later.