Which VAT Rate Applies to Your Construction Project? (Explained Simply)

Introduction

VAT in the construction industry is one of the most misunderstood areas of tax. From new builds to renovations and conversions, each project can attract a different VAT rate, 20%, 5%, or even 0%. Knowing which applies isn’t optional; it’s a legal requirement.

Get it right and you protect your margins and reputation. Get it wrong and you risk penalties, disputes, and serious cash flow problems.

At Jones Financial Accounts (JFA), we help SMEs and construction firms cut through the complexity, ensuring VAT is applied correctly across every stage of a project.

Explanation

The VAT rate depends on the type of project and the work being carried out. HMRC splits construction projects into three main VAT categories:

• Standard rate (20%) – Applies to most general construction, repairs, extensions, and finishing work unless specific rules reduce it.

  
  

• Reduced rate (5%) – Applies in special situations, such as residential conversions, renovations of properties empty for more than two years, and some energy-saving improvements.

  
  

• Zero rate (0%) – Applies to the construction of brand-new residential dwellings and certain charitable buildings.

But how does this apply in practice, from planning to completion?

Breaking Down the VAT Rates by Construction Stage

🔹 Zero-Rated (0%) – New Residential Dwellings

• Planning and groundwork: Foundations, site clearance (linked directly to the build), demolition of an old structure for a new dwelling.

  
  

• Structural build: Bricklaying, roofing, timber framing, concrete pouring.

  
  

• First fix: Plumbing, wiring, insulation, heating systems installation.

  
  

• Second fix/finishing: Doors, skirting boards, built-in kitchens and bathrooms.

  
  

• Final touches: Decorating and tiling integral to the building.

  
  

Key rule: Applies only to brand-new residential homes (not extensions or refurbishments). Garages and outbuildings may qualify if built at the same time as the new dwelling.

🔹 Reduced Rate (5%) – Renovations & Conversions

• Applies to:

  • Renovations of residential property empty for 2+ years.

  • Converting non-residential buildings into homes (e.g., an office into flats).

  • Certain energy-saving measures (e.g., insulation, solar panels).

    
    

• Examples by stage:

  
  

  • Demolishing internal walls as part of a conversion → 5%.

  • First fix rewiring and plumbing during conversion → 5%.

  • Installing energy-efficient boilers or insulation → 5%.

  • Final finishes like flooring or decorating within an eligible conversion → 5%.

👉 Key rule: Always keep evidence (e.g., proof property was empty) or HMRC can reclassify the project to 20%.

🔹 Standard Rate (20%) – Most Other Work

• Applies to:

  • Extensions, conservatories, loft conversions.

  • Repairs and maintenance (roof repairs, new windows, painting).

  • Landscaping and fencing.

  • Cleaning services post-construction (“sparkle clean” to prepare for handover).

  • Supply-only materials (when not installed by the contractor).

  
  

• Examples by stage:

  • Clearing a site where no new dwelling is built → 20%.

  • Installing carpets (not integral to the build) → 20%.

  • Adding a conservatory or garage to an existing property → 20%.

    
    

👉 Key rule: If the project isn’t new build or eligible conversion, assume 20%.

Luxury & Non-Essential Extras

This is where many contractors get caught out, even if these are in the original new build plans, they do not qualify for zero-rating.

• Always Standard-rated (20%):

  
  

  • Swimming pools, hot tubs, saunas.

  • Garden works: patios, decking, sheds, fencing, landscaping.

  • Detached garages or outbuildings not constructed at the same time as the dwelling.

  • White goods and appliances (fridges, dishwashers, ovens, unless built-in and integral).

  • Luxury fittings beyond what HMRC defines as “integral” to the dwelling.

Key principle: Zero-rating is for the dwelling itself. Anything classed as a “luxury” or “external feature” stays at 20%, even if it’s drawn in the plans and signed off by Building Control.

The crucial point: HMRC doesn’t care if it’s “planned”, they only care if the item is integral to the dwelling.

Misconceptions About VAT in Construction

VAT in construction is surrounded by myths. Here are the most common and costly, misconceptions:

• “If luxury extras are in the new build plans, they’re zero-rated.” Wrong. HMRC draws a line between what is essential to the dwelling (zero-rated) and what is non-essential. Swimming pools, garden landscaping, and fitted appliances remain 20%, even if shown in the original build plans.

  
  

• “Decorating is always 20%.” False. Decorating as part of a new build is 0%. If done during a qualifying conversion, it’s 5%. If it’s a general redecoration or upgrade in an existing property, then it’s 20%.

  
  

• “Site clearance is always standard-rated.” Not true. If it’s clearance directly linked to a new dwelling, it can be zero-rated. Standalone clearance without a new build remains 20%.

  
  

• “Conversions always get 5%.” Not necessarily. Only specific qualifying conversions (e.g., commercial building to residential, or a house into flats) apply. Without proof, HMRC reverts the rate to 20%.

Key Takeaways

• VAT rates vary by project stage: 0% for new dwellings, 5% for certain conversions, 20% for repairs and luxuries.

• Luxury extras (pools, gardens, appliances) are always 20%, even in new build plans.

• Site clearance, decorating, and landscaping each have exceptions, know the rules.

• Evidence is critical: HMRC requires proof to justify reduced or zero rates.

Wrapping up today's insights, tomorrow we simplify another accounting challenge