VAT in Construction: 20%, 5%, 0% and Exempt Explained
Updated: Aug 26
Key Takeaways
Construction work falls into four VAT categories: standard rate (20%), reduced rate (5%), zero rate (0%), and exempt.
Most work on existing buildings is standard-rated at 20% — repairs, extensions, loft conversions, and general renovation.
New-build residential construction is zero-rated (0%), while qualifying conversions and properties empty for two or more years attract the 5% reduced rate.
Zero-rated is not the same as exempt: zero-rated work is still taxable, counts towards your VAT threshold, and lets you reclaim input VAT — exempt supplies do not.
The VAT domestic reverse charge means most VAT-registered subcontractors don't charge VAT to VAT-registered contractors at all; the customer accounts for it instead.
VAT in construction is charged at one of four rates: 20% standard, 5% reduced, 0% zero-rated, or exempt. Which applies depends on the type of building and the type of work, not on who does it. As a general rule, work on existing buildings is standard-rated, new-build housing is zero-rated, and certain conversions and renovations qualify for the 5% reduced rate.
The four VAT categories at a glance
Category | Rate | Typical construction examples |
Standard rate | 20% | Repairs, maintenance, extensions, loft conversions, most renovation work, professional fees |
Reduced rate | 5% | Conversions that change the number of dwellings, homes empty 2+ years, certain energy-saving materials |
Zero rate | 0% | New-build houses and flats, alterations for disabled people, qualifying charitable buildings |
Exempt | No VAT | Sale or lease of existing buildings and land (not construction services) |
Standard rate (20%)
The 20% standard rate is the default. If a job doesn't specifically qualify for a lower rate, it's standard-rated.
In practice, that covers the bulk of everyday construction work:
Repairs and maintenance of any kind
Extensions, annexes, and granny flats
Loft and garage conversions that don't change the number of dwellings
General refurbishment and renovation of an occupied home
Professional fees — architects, surveyors, and consultants are always standard-rated, even on a zero-rated new build
The last point catches people out on new-build projects: the building work can be zero-rated while the architect's invoice still carries 20%.
Reduced rate (5%)
The 5% reduced rate applies to specific categories of work on existing buildings.
The main ones for construction businesses are:
Changed number of dwellings conversions — converting a house into flats, flats back into a single house, or a non-residential building into dwellings.
Empty property renovations — work on a home that has been unoccupied for at least two years before the work starts. You need evidence, such as council tax or utility records.
Energy-saving materials — insulation, solar panels, heat pumps and similar. Note the timing: these currently qualify for the zero rate until 31 March 2027, after which the 5% reduced rate is expected to apply again.
Two practical points. The reduced rate is applied by the VAT-registered contractor on the invoice — it isn't something the customer reclaims afterwards. And if only part of a project qualifies, the invoice must be split: a qualifying conversion at 5% alongside, say, landscaping at 20%.
Zero rate (0%)
Zero-rating is the most valuable relief in construction, and the conditions are strict.
It applies to:
The construction of new dwellings — new houses and flats, including self-builds.
Alterations to suit the needs of people with disabilities in residential property.
New buildings for a relevant charitable or residential purpose, where the customer provides a certificate.
For a new dwelling to qualify it must generally be self-contained living accommodation, have full planning permission, and be capable of being sold or used in its own right. Conversions that create a dwelling within an existing building usually can't be zero-rated, though they may qualify for the 5% rate instead. Because the conditions are detailed and the sums are large, this is an area where a construction-specialist accountant is worth involving before you price the job — getting it wrong either loses you the work or leaves you owing HMRC the VAT you didn't charge.
Exempt — and why it's different from zero-rated
This is the distinction that causes the most confusion. Zero-rated and exempt both mean the customer pays no VAT, but they behave completely differently for you as a business:
Zero-rated (0%) | Exempt | |
Is it a taxable supply? | Yes, taxed at 0% | No |
Counts towards the £90,000 VAT threshold? | Yes | No |
Can you reclaim input VAT on related costs? | Yes | No |
Exempt supplies in property are mainly the sale or lease of existing buildings and land, rather than construction services. The practical consequence is that if you make exempt supplies, you generally can't recover the VAT on your related costs — which is why zero-rating is far better for a business than exemption, despite both meaning "no VAT on the invoice."
The VAT domestic reverse charge
Introduced on 1 March 2021, the domestic reverse charge changed how VAT works between construction businesses, and it's the rule most likely to affect a subcontractor day to day.
Under it, a VAT-registered subcontractor invoicing a VAT-registered contractor doesn't charge VAT. Instead, the customer accounts for both sides of the VAT on their own return. HMRC brought it in to stop fraud where a supplier charged VAT and then disappeared without paying it over.
It applies where all of the following are true:
Both parties are VAT-registered in the UK
The payment falls within CIS
The supply is standard-rated or reduced-rated (zero-rated work is excluded)
The customer is not an end user — an end user is someone who uses the building themselves rather than selling the work on
Your invoice must state that the reverse charge applies and show how much VAT is due, without adding it to the total. The most common error is a subcontractor charging 20% VAT out of habit on a job where the reverse charge should have applied — which leaves the contractor unable to reclaim it and the invoice needing reissuing.
When do you need to register for VAT?
You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period — not a tax year — or if you expect to exceed it in the next 30 days alone. The deregistration threshold is £88,000. Zero-rated work still counts towards the threshold; exempt supplies don't. Registration is also available voluntarily below the threshold, which can suit businesses with significant VAT on materials.
Common VAT mistakes in construction
Charging 20% on work that qualifies for 5% or 0%, making your quote uncompetitive.
Zero-rating a conversion that only qualifies for the reduced rate.
Forgetting the reverse charge and charging VAT to a VAT-registered contractor.
Assuming professional fees follow the building's rate — they're standard-rated regardless.
Failing to evidence a claim, such as the two-year empty period, and losing the reduced rate on review.
Not splitting a mixed invoice where only part of the work qualifies for a lower rate.
Frequently Asked Questions
Is construction work zero-rated for VAT? Only certain work is. The construction of new dwellings — new houses and flats, including self-builds — is zero-rated, as are alterations for people with disabilities and qualifying new charitable buildings. Most work on existing buildings, including repairs, extensions, and general renovation, is standard-rated at 20%.
What's the difference between zero-rated and exempt? Both mean the customer pays no VAT, but zero-rated work is still a taxable supply: it counts towards your £90,000 VAT threshold and you can reclaim input VAT on related costs. Exempt supplies do neither, so you generally can't recover VAT on your costs. Zero-rated is significantly better for a business.
When does 5% VAT apply to building work? Mainly to conversions that change the number of dwellings, renovations of homes empty for at least two years, and certain energy-saving materials. The contractor applies the 5% rate on the invoice — the customer doesn't reclaim it later. Evidence of eligibility, such as council tax records for an empty property, is essential.
Do I charge VAT to a contractor under the reverse charge? Usually not. If you're both VAT-registered, the payment falls under CIS, the work is standard or reduced-rated, and your customer isn't an end user, the reverse charge applies and you don't add VAT to your invoice. You state on the invoice that the reverse charge applies and show the VAT amount due. Because the end-user test is easy to misjudge, it's worth having a construction-specialist accountant confirm how your contracts should be treated.
Does zero-rated work count towards the VAT threshold? Yes. Zero-rated supplies are taxable at 0%, so they count towards the £90,000 registration threshold. This surprises some new-build specialists, who can be required to register despite charging no VAT to customers — and registering lets them reclaim VAT on materials, so it's often an advantage.
Getting the rate right on your next job
Talk to the SiteLedger team on 01706 595 370 and we'll review how VAT should apply to your contracts before you quote. As construction-specialist accountants, VAT in the building trade is what we deal with every day.
Written by the SiteLedger team — construction-specialist accountants. Last reviewed: July 2026. Figures and rules apply to the 2026/27 UK tax year. This is general guidance, not personal tax advice; VAT on building work is highly fact-specific, so speak to us about your particular project.