Understanding VAT Construction and Property Companies
As a business in the construction or property sector, VAT might seem like just another tax — but it can be a bit more complicated than that. The rules around VAT for these industries are different from most, and getting them wrong can result in penalties or missed savings.
In this guide, we’ll break down how VAT applies to construction and property businesses, how you can maximise your VAT reclaims, and what you need to know to stay compliant with HMRC.
Why VAT Matters for Construction & Property Businesses
In the construction and property sectors, VAT plays a big role in how you manage your costs, cash flow, and profit margins. Whether you’re building homes, working on commercial projects, or managing property sales, VAT will affect many aspects of your business.
The most important thing to understand is that VAT isn’t just something you pay out of pocket — it’s something you can reclaim on a lot of your business expenses. But in order to do that correctly, you need to know the right rates and the right way to apply them.
What VAT Rates Apply to Construction & Property?
When it comes to VAT, construction and property businesses have to deal with a range of rates, and understanding when to apply each one is essential.
Zero-Rated VAT
Some construction services are zero-rated, meaning you charge your customer 0% VAT but can still reclaim VAT on the materials you buy for the project. This is common in:
- New builds: Residential properties being built from the ground up.
- Renovations and conversions: Turning non-residential buildings into homes may also qualify for zero-rating.
- Disabled adaptations: Work done to make a property more accessible for someone with a disability.
Zero-rated doesn’t mean no VAT, it just means that the tax is calculated at 0%. You’ll still need to keep track of everything.
Standard Rate VAT (20%)
For most construction and property-related services, you’ll apply the standard VAT rate of 20%. This includes things like:
- Renovations or repairs to existing residential properties
- Extensions or alterations to houses
- Work on commercial properties
If your work falls into this category, you’ll charge the usual VAT rate on your services and materials.
The Reverse Charge in Construction
If you’re working in the construction industry, you may need to use the reverse charge. This rule means that, in certain circumstances, the buyer — rather than the supplier — accounts for the VAT.
The reverse charge typically applies when:
- Both the supplier and buyer are VAT-registered.
- The supply is for building or construction services (or certain materials).
- The buyer is responsible for paying VAT directly to HMRC.
This system helps to prevent VAT fraud in the construction sector by making sure that VAT is paid straight to HMRC, rather than through potentially fraudulent chains of subcontractors.
VAT Reclaims for Construction & Property
One of the main benefits of VAT registration is the ability to reclaim VAT on your business expenses. But the rules for reclaims in construction and property can be more complicated than in other industries.
What You Can Reclaim:
- Materials: If you’re working on a zero-rated project (like a new build), you can reclaim VAT on the materials you purchase.
- Subcontractor services: If you’ve been charged VAT for services provided by subcontractors, you can reclaim that VAT as well.
- Business expenses: Things like office supplies, equipment, and even professional services related to your business can usually be reclaimed.
What You Can’t Reclaim:
- Exempt property services: If you’re involved in letting or selling residential property, these services are exempt from VAT, meaning you can’t reclaim VAT on related costs.
- Non-business expenses: Any VAT spent on personal use or on services that aren’t related to your business won’t be eligible for a reclaim.
VAT for Property Developers
If you’re developing property, VAT will apply differently to your sales and purchases.
Sales of New Residential Property
- Zero-rated VAT: The sale of newly built residential property is usually zero-rated. This means you don’t charge VAT on the sale, but you can still reclaim VAT on the construction costs.
Sales of Commercial Property
- Standard VAT: The sale of commercial property is usually subject to the standard VAT rate of 20%. However, there are exceptions, such as if the buyer opts to tax the property.
Property Letting
In general, residential property letting is exempt from VAT, meaning you can’t charge VAT on rent. However, you can choose to opt to tax the property, which allows you to charge VAT on rent and reclaim VAT on associated expenses.
Subcontractors and VAT in the Construction Industry
The relationship between contractors and subcontractors in the construction industry means VAT needs to be handled carefully.
If you’re a subcontractor, you’ll need to:
- Charge VAT on your services if you’re VAT-registered and your services are VATable.
- Reclaim VAT on materials you purchase for the job.
If you’re a main contractor, you’ll need to:
- Manage reverse charge VAT if applicable (for certain supplies from VAT-registered subcontractors).
- Keep track of subcontractor invoices and ensure VAT is charged correctly.
How a VAT Accountant Can Help Construction & Property Businesses
Given the complexities of VAT in construction and property, working with an accountant who understands these specific rules is crucial. A VAT accountant can:
- Help you choose the right VAT scheme for your business (Flat Rate, Cash Accounting, etc.).
- Ensure you’re applying the right VAT rates to your work and transactions.
- Maximise VAT reclaims, especially on complex property or construction projects.
- Keep you compliant with VAT regulations and prevent mistakes that could lead to penalties.
Conclusion
For construction and property businesses, VAT isn’t just about paying tax — it’s about managing your cashflow, reclaiming the VAT you’re entitled to, and ensuring that your business stays compliant with HMRC’s rules.
If you need help with VAT registration, reclaiming VAT, or ensuring your business is applying the right VAT rates, speak to a VAT specialist who understands the construction and property sectors.
At AccounTax Zone, we work with construction and property businesses in London to ensure VAT compliance, help reclaim VAT on your projects, and make VAT filing as simple as possible.
