VAT On Construction And Development Projects
The rate of VAT to charge on Construction and Development Projects can often cause confusion as the supply may be chargeable at the standard rate (20%), reduced rate (5%), zero rate (0%), or the supply may be exempt. This article aims to summarise the underlying rules that determine which rate of VAT should be used.
The rates, exceptions and rules
The VAT legislation states that supplies of land and property are exempt supplies, subject to a number of exceptions detailed below. Construction services themselves are never VAT exempt, but the VAT rate can vary depending on the work being done and the type of property.
|Summary of rate
|Exceptions and rules
|VAT rate of 0% on the supply being made. VAT on any expenditure incurred is still recoverable
|• The construction of a new qualifying dwelling or building used for relevant residential or charitable purpose & services associated (certificate may be required) – in most circumstances a house or flat for residential use is covered
• Conversion of a non-residential building into a qualifying dwelling or residential building
• Conversion of a dwelling converted from a property not lived in for at least 10 years immediately before you start work – you cannot normally zero rate work to a property that has previously been lived in (usually exempt)
• The services supplied in the course of the construction or conversion of the buildings above (other than those specifically excluded – see standard rated section).
• Alterations to a property for disabled use (certificate needed) eg Ramps, widening passageways, bathrooms, lifts
|VAT at 20%, normal VAT rules apply
|• Construction services specifically excluded from zero-rating such as goods hired (scaffolding), and services such as architectural, surveying, consultancy & supervising
• Sale of freehold interest in a new or uncompleted non-qualifying building
• Any supply which would otherwise be exempt but in respect of which an option to tax has been exercised
|Similar to standard rated but at a rate of 5% rather than 20%
|• A change in use of the property ie conversion of premises to a different residential use such as a change in the number of dwellings (multiple occupancy to single occupancy and vice versa)
|Outside the Scope
|No VAT chargeable or recoverable, when outside the scope of VAT no figures should hit the VAT return
|• Certain supplies which form part of the transfer as a going concern
|No VAT chargeable on the supply being made, and no VAT can be recovered on expenditure incurred
|For the avoidance of doubt, if you are a property developer the following supplies are considered to be exempt from VAT, ie any associated costs are NOT recoverable:
• Renovating a house to resell
• Renting of residential property
• Renting commercial property (where no option to tax in place)
Tax planning points
It is key to establish the VAT rate that is applicable at the start of the project and to take advice when you think this may impact on any other projects, or if you believe there is a potential change further down the line. At EQ we have an experienced Property and Construction team, who can advise you on any of these matters.
- Change of intention
Where property is built with the intention of being sold on (zero-rated supply therefore VAT on associated purchases are recoverable), but instead is rented out once built (exempt status as above), this represents a change of intention and can result in all or some of the VAT which was previously recovered having to be repaid to HMRC. This can be avoided if tax planning advice is taken regarding the structure of the company when you suspect that the intention is likely to change.
- Mixed projects
Where you have a mix of projects, for example you renovate a house to sell on (exempt) and you are also building a house to sell on (zero-rated), then it is important to ensure that you record which purchases are for which project. In this situation, VAT Partial Exemption applies and a quarterly calculation (and annual adjustment) will be required to determine the portion of VAT that is recoverable on other ‘non-specific’ overheads.
- Separation of ownership and development
In a situation where you have purchased a property and are also providing the construction services to develop this property, it may be beneficial from a VAT planning perspective to separate the ownership from the development services.
- Timing of services on VAT rate
The timing of the construction services provided as part of a development that qualifies as zero-rated can be important in determining whether the services themselves are also zero-rated or standard rated. For example, civil engineering works carried out shortly before the construction of the building takes place is zero-rated, but demolition work carried out prior to planning permission is standard rated. It is important to ensure the timing of services is thought out prior to these being delivered to ensure the optimum VAT rate applies.
If you have any queries regarding the VAT rates, please contact our VAT taxperts.