Comprehensive Guide to VAT Notice 708: VAT Treatment for UK Building and Construction Services

VAT Notice 708 is HMRC’s guidance on how VAT applies to building and construction work in the UK. It explains when building work and materials can be zero-rated or reduced-rated at 5%, and when the sale or long lease of a building is zero-rated. Construction work is normally standard-rated at 20%, with exceptions set out in the notice.

The VAT Notice 708 guideline helps all parties involved in construction projects and the construction industry, in general, to understand when VAT is charged and at what rate.

Scope and Application of VAT Notice 708

Several construction-related activities, such as new buildings, conversions, renovations, and repairs, fall under the scope of VAT Notice 708. The construction of a new building and work to an existing building are normally standard-rated at 20%.

Where a project meets specific conditions, the supplier can apply the reduced rate of 5% or the zero rate instead. VAT Notice 708 sets out the conditions for each rate: standard, reduced, or zero.

Standard-Rated Construction Services

The standard rate of 20% is usually applied to constructing new buildings or general repair or maintenance work on existing building structures. Although this is set as a norm, several exceptions apply. In those cases, either a reduced or zero VAT rate is applied.

Reduced-Rated Construction Services

The reduced rate of 5% can apply to converting premises into a single household dwelling, a different number of single household dwellings, a multiple occupancy dwelling (such as bedsits), or premises intended for use solely for a relevant residential purpose.

It can also apply to renovating or altering a dwelling, or premises intended solely for a relevant residential purpose, that hasn’t been lived in during the 2 years before the work starts. Outside Notice 708, the 5% rate also covers grant-funded installations of heating equipment in the sole or main residence of a qualifying person (VAT Notice 708/6), and supplying and installing mobility aids in the home of someone aged 60 or over (VAT Notice 701/7).

One of the main goals of the green initiatives is to increase energy efficiency and support environmental goals by enabling more affordable installation of energy-saving materials and heating equipment in residential properties. To achieve this, HMRC issued VAT Notice 708/6, which lists the energy-saving materials that qualify for relief, such as insulation, solar panels and heat pumps.

A zero VAT rate applies to installing specified energy-saving materials in residential accommodation from 1 May 2023 to 31 March 2027. From 1 February 2024, it also applies to the groundworks needed to install ground and water source heat pumps. From 1 April 2027, these installations revert to the reduced rate of 5%.

Zero-Rated Construction Services

Zero-rating applies under certain conditions, particularly for constructing any of the seven types of qualifying buildings stated in the VAT Notice 708. Building services can be zero-rated if provided during the construction of a qualifying building where possession of a valid certificate is secured when required and if the services are not explicitly excluded from zero rating.

Some examples of when a qualifying building is not constructed and when the zero rate does not apply include a 'granny' annex or house that cannot be used or disposed of separately from another building, a house incorporating parts of a demolished earlier building, a detached swimming pool not designed as a residential building, or a detached building extending a care home’s facilities, as these do not meet the conditions for a qualifying building.

Understanding Certificates for Qualifying Buildings

The recipient of the supply must complete and provide certificates to the contractor or developer to enable zero or reduced VAT rates on supplies for qualifying buildings. Certificates are needed for buildings used solely for a relevant residential purpose or solely for a relevant charitable purpose. There’s no requirement to hold one for buildings used as dwellings.

Relevant charitable purpose buildings do not qualify for any reduced rate of VAT. The reduced rate only applies to qualifying residential properties.

Two certificates are available for qualifying buildings: zero-rated or reduced-rated building work and zero-rated sales or long leases. A certificate confirms that the building is intended to be used solely for a qualifying purpose.

Contractors or developers must retain a valid certificate for zero-rated or reduced-rated supplies related to buildings used solely for relevant residential or zero-rated supplies related to buildings for charitable purposes. In addition to obtaining certificates, other relevant conditions must be met to apply a zero or reduced VAT rate. Contractors must take all reasonable steps to check the validity of certificates and retain related correspondence. If they have done so and acted in good faith, they will not normally be asked to account for VAT if the certificate is later found to have been issued in error.

Subcontractors must apply the standard VAT rate on certificated buildings and cannot use the certificate themselves.

Customers must issue certificates for zero-rated or reduced-rated work before their supplier makes a supply. They can use the VAT notice 708 certificate template issued by HMRC or create their own if it contains the same information and declaration.

Issuing incorrect certificates can result in penalties equivalent to the VAT not charged. However, if a person at fault can prove that there is a reasonable excuse for issuing the incorrect certificate, the penalty can be prevented or withdrawn.

Practical Implications of VAT Notice 708

New Residential Construction

A construction company builds a new house designed as a dwelling. Provided the conditions in VAT Notice 708 are met, its construction services can be zero-rated, so it doesn’t charge VAT on them.

Standard Repairs and Maintenance

A local business hires a contractor to repair the roof of its commercial building. These repair services are subject to the standard VAT rate of 20%, as they do not qualify for reduced or zero rates under VAT Notice 708. The business must account for this VAT cost in its budgeting.

Conclusion

Understanding and correctly applying VAT Notice 708 is crucial for contractors, developers, and customers in the construction industry to ensure compliance and avoid potential penalties while also benefiting from the zero and reduced rates where they apply.

VAT Notice 708 provides clear criteria for applying standard, reduced, or zero VAT rates, depending on the nature of the work and the type of building involved.

Source: HMRC - Buildings and construction (VAT Notice 708), HMRC - Energy-saving materials and heating equipment (VAT Notice 708/6), HMRC - Reliefs from VAT for disabled and older people (VAT Notice 701/7), GOV.UK - VAT rates