• 13 Sep 2018
  •   Comments Off on How to save on VAT in construction projects

Many who take on construction projects assume that the VAT on building work is 20%, as in most other cases. However, there are specific instances in which this tax can be reduced to 5%, vastly increasing the profit gained from the endeavour. Both builders and developers must be aware of which instances this may occur, as it is their duty to ensure that they pay the right amount of tax to the HMRC, on top of potentially resulting in a big loss.

Where does the 5% tax apply?

It is interesting to note that, aside from just applying to the work conducted for a specific construction project, the 5% VAT tax is also applicable to the materials supplied for that project, but only if they are provided along with the building purposes – materials sourced separately are subjected to the 20% VAT tax.

When it comes to construction projects, there are three main categories in which the 5% tax rate is applicable:

  • residential conversions
  • empty property work
  • design and build projects

It is important to note that many people involved in the project might object to applying for a lower tax rate on the project for fear of breaking the law. It is the contractor’s job to make sure they follow through with the 5% tax as not only is it completely legal in these cases, you might end up losing substantial amounts of money by not following through.

Residential conversions

This term applies to buildings that are converted from non-residential to a dwelling, i.e. a house, block of flats, etc. Commonly conducted in big cities where it might be profitable to re-purpose an old office building into an apartment building than building a new one, this type of procedure is generally accepted as being subjected to the reduced VAT tax of 5%. This also applies if the number of dwellings is changed within a residential area – e.g. if a detached house is divided into two or three semi-detached houses, or if the number of apartments on a given floor of a block is changed.

Empty properties

As the name suggests, if a residential property has been unoccupied for at least two years, than any construction work performed on it is subject to 5% VAT. Of course, in order for this to happen, you must provide proof of the house being empty for that period of time, e.g. council tax information, which must, of course, come from a third party source.

Design and Build

A 5% VAT is also possible in the event that a client receives a service directly from a professional company, while their tax towards the architects, project managers, and other parties are still at 20%. This option leaves both the client and the contractor better off.


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