VAT on new builds and construction: zero, 5% and 20% rates

VAT in construction depends on what is being built and for whom, not on the type of work. Laying bricks can be zero-rated on a new house, 5% on a conversion and 20% on an extension. Getting the rate right matters for builders, who can face assessments years later, and for customers, who cannot recover VAT charged in error from HMRC.

The three rates at a glance

New dwellings: the zero rate

The construction of a new building designed as a dwelling, or a number of dwellings, is zero-rated. The relief covers:

• the services of the builder in the course of construction
• building materials and certain fixtures the builder supplies and incorporates in the building, such as kitchens (excluding most appliances), bathrooms and fitted wardrobes
• a garage built at the same time as the dwelling and intended to be occupied with it

For a building to count as a dwelling it must be self-contained, with no internal access to another dwelling, and there must be no planning restriction preventing separate use or sale. A granny annexe that cannot be sold separately does not usually qualify.

The zero rate does not cover:

• professional and supervisory services, such as architects, surveyors and project managers, which are standard-rated
• hire of plant or equipment without an operator
• electrical or gas appliances, carpets and garden ornaments, which are standard-rated

Relevant residential and charitable buildings

Construction of buildings used for a relevant residential purpose, such as care homes, children’s homes and student accommodation, or a relevant charitable purpose, such as a village hall or a charity’s non-business premises, can also be zero-rated. The customer must give the builder a certificate confirming the intended use before the work starts. Giving an incorrect certificate can lead to a penalty.

Selling a new home

The first sale of the freehold of a new dwelling by the person who built it, or the grant of a lease of more than 21 years (20 years in Scotland), is zero-rated. This lets developers reclaim the VAT on their costs. Later sales of the same property are exempt.

Conversions and empty homes: the 5% rate

The reduced rate of 5% applies to the building work and materials for:

• converting a non-residential building, such as a barn, office or shop, into dwellings
• changing the number of dwellings, such as converting a house into flats or flats into a single house
• converting a building into a house in multiple occupation, or into a relevant residential building such as a care home
• renovating or altering a dwelling that has been empty for two years or more before the work starts

For the empty homes relief the builder needs evidence of the empty period, such as a letter from the local authority’s empty property officer or council tax records. As with new builds, professional fees are standard-rated.

Work on existing homes: the standard rate

Most work on homes that are already lived in is standard-rated at 20%: extensions, loft conversions that do not create a new dwelling, kitchen and bathroom refits, repairs and decorating. Exceptions include:

• energy-saving materials (below)
• certain adaptations for a disabled person’s use, such as ramps, widened doorways and accessible bathrooms, which can be zero-rated
• work that qualifies for the 5% rate because the property has been empty for two years or more

Energy-saving materials

The installation of qualifying energy-saving materials in residential accommodation, and in buildings used solely for a relevant charitable purpose, is zero-rated until 31 March 2027. The zero rate has applied in Great Britain since 1 April 2022 and across the whole UK, with a wider list of materials, since 1 May 2023. Qualifying materials include:

• insulation for walls, floors, roofs and lofts, and draught stripping
• solar panels, and from 1 February 2024 batteries installed with or retrofitted to solar panels
• air source, ground source and water source heat pumps, including necessary groundworks from 1 February 2024
• wood-fuelled boilers, micro combined heat and power units, and wind and water turbines
• controls for central heating and hot water systems

From 1 April 2027 these installations revert to the 5% reduced rate. The relief applies to the installation service; buying materials to fit yourself is standard-rated.

The domestic reverse charge

Since March 2021, standard-rated and reduced-rated construction services supplied between VAT-registered businesses within the Construction Industry Scheme are usually subject to the domestic reverse charge, so the contractor rather than the subcontractor accounts for the VAT. It does not apply to zero-rated work or to supplies to end users. See our reverse charge guide for the detail.

The DIY housebuilders scheme

Individuals who build their own home, or convert a non-residential building into a home, cannot register for VAT to recover the VAT they pay. The DIY housebuilders scheme lets them reclaim it instead:

• new builds: reclaim VAT on building materials that would have been zero-rated if supplied by a builder
• conversions: reclaim VAT on materials and on the services of builders who should have charged 5% but charged more

The home must be for you or your family to live in, not for business or sale. You make one claim, online or on paper, within six months of completion (the limit was three months for claims made before 5 December 2023). Keep original invoices, and evidence of completion such as the building control certificate.

Getting the rate right

Builders bear the risk of charging too little. If you zero-rate or reduce-rate work that does not qualify, HMRC can assess the VAT you should have charged, and you may not be able to recover it from the customer. Before starting a project:

• confirm the nature of the building and the planning permission
• obtain any certificate the customer must give before work starts
• keep evidence for the empty homes relief
• split invoices so that standard-rated items, such as appliances or professional fees, are charged at 20%

Frequently asked questions

Is building a house extension zero-rated?

No. Extensions to existing homes are standard-rated at 20%. The zero rate is for new, self-contained dwellings.

Do architects charge VAT on a new build?

Yes. Professional services such as architects, surveyors and engineers are standard-rated even when the construction itself is zero-rated.

What VAT rate applies to converting a barn into a house?

The building work and materials for converting a non-residential building into a dwelling qualify for the 5% reduced rate. If the developer then sells the converted dwelling, the first sale is zero-rated.

How long must a house be empty for the 5% rate?

At least two years before the work starts, with evidence of the empty period.

Is installing solar panels zero-rated?

Yes, in residential accommodation until 31 March 2027, when installations revert to the 5% reduced rate.