In this article, our Julian Record considers the VAT implications when working on domestic projects and how best to approach this thorny subject. Whilst many measures extent to non-domestic construction you should obtain specialist advice.
When planning a construction project the treatment of VAT is an important consideration as it can save considerable cost, but care needs to be taken to ensure one gets the maximum benefit within the guidance set down by HMRC.
Building and Construction is currently covered by VAT notice 708 but there is a supplementary VAT notice, 708/6 covering energy saving materials and heating equipment. I shall refer to this as “ESM”.
The key measures under these notices are as follows:-
- Zero rate on construction of new dwelling(s);
- Zero rate on installation of ESM (till 31 March 2027)*;
- 5% rate on conversions of non-residential to residential;
- 5% rate on renovations where property has been empty for >2 yrs;
- 20% rate on professional services (other than in respect of design and build contracts).
*Will revert to reduced rate of 5% unless current rules changed by new government!.
The complications arise in respect of the installation of ESM as these are often undertaken alongside other general refurbishment works which are standard rated at 20%. Before we address the difficulties this poses, let’s first define what constitutes ESM. I won’t list everything here but this includes: insulation, solar panels, battery storage, air and ground source heat pumps, heating controls and draught stripping. ESM does not include secondary glazing, double glazing or replacement conservatory roofs using the Guardian or similar systems.
As already mentioned, the issue comes when ESM is provided alongside other works such as the re-roofing of the property, extension works or the installation of new kitchens & bathroom. In these instances all the works including the ESM are standard rated at 20% as the ESM is provided alongside general building works which are standard rated. These cannot simply be separated out by the builder using different invoices for different elements.
The best way to separate the two is to either appoint separate contractors to undertake the ESM and the general building works or appoint the same builder under two separate contracts for the ESM and then the general building works. In the case of the latter it is important, however, that these are undertaken at different times with a time gap of at least one week (but ideally more) between the two contracts otherwise, the works would be viewed by HMRC as being a single contract and therefore standard rated.
So in summary great care needs to be exercised in order to get the maximum VAT benefit when undertaking ESM works alongside other building works. Stand alone ESM such as the installation of an air source heat pump or solar panels is straight forward. It is projects where there is a large element of general modernisations being undertaken alongside other ESM such as internal wall insulation etc which are most problematic and open to challenge from HMRC. Often, builders might unwittingly supply good and services at the lower rate of VAT – they are builders at the end of the day, not tax experts, and there is a clear financial benefit to clients which might help a builder to win a job. However, the builder can be unwittingly exposing themselves to challenge from HMRC if not structured correctly. This could later come back to clients via a claim for the unclaimed VAT if this aspect has not been addressed satisfactorily at the outset.
Julian Record is a Chartered Building Surveyor with over 25 years experience in practice. If you would like to discuss a matter then please contact me and I will endeavour to assist!.
Please note this article is for general information and VAT guidance is subject to change. You should not rely on the content without undertaking your own due diligence.
August 2024.