Avoid the VAT Traps That Sink Construction Companies—and Discover the Rules That Protect You

Navigating the complexities of VAT in construction, a worker cross-references building plans on a tablet.

VAT in construction can be confusing, especially with different rates and the domestic reverse charge. But getting the basics right protects your margins and avoids HMRC disputes.

When You Need to Register for VAT

You must register if your VAT-taxable turnover exceeds £90,000 (current threshold – check HMRC for updates) in a 12‑month rolling period, or if you expect to exceed it in the next 30 days.

Action points:

• Review your turnover monthly – don’t wait until year-end. 

• If you’re close to the threshold, speak to an adviser about the pros and cons of voluntary registration (e.g. reclaiming input VAT vs. charging clients).

VAT Rates in Construction (Simplified View)

Common scenarios:

• Standard rate (20%) 

• Most construction services for commercial properties. 

• Repairs, maintenance and some refurbishments on existing residential properties.

• Zero-rated (0%) 

• Construction of new residential dwellings (meeting specific HMRC criteria). 

• Some work related to qualifying charitable buildings.

• Reduced rate (5%) 

• Certain renovations to residential properties that have been empty for at least 2 years. 

• Some energy-saving materials installations.

Action points:

• Check whether a project is new build, conversion, or renovation – it can affect the VAT rate. 

• Keep clear written descriptions on invoices (e.g. “construction of new dwelling to approved plans”) to support any zero or reduced rate applied.

Domestic Reverse Charge for Construction

For many B2B construction services within the scope of CIS:

• Subcontractors no longer charge VAT on qualifying invoices to VAT-registered contractors. 

• Instead, the contractor accounts for the VAT under the domestic reverse charge.

This applies to most construction services that would normally be standard-rated and reported under CIS, unless they’re supplied directly to an end user (like a homeowner).

Action points:

• Check if your customer is an end user (e.g. a property owner using the service themselves). If so, you may still charge VAT as normal. 

• Make sure invoices clearly state when reverse charge applies, using wording such as: 

  “Reverse charge: Customer to account to HMRC for VAT.”

Good VAT Habits for Construction Firms

• Keep separate records for labour, materials, and subcontractors. 

• Check VAT numbers of new business customers on the VIES or HMRC checker. 

• Use software that supports Making Tax Digital (MTD) to reduce errors in submissions.

Simple next step: 

Pick one current or recent project and review the VAT rate, invoicing, and reverse charge treatment. Correcting one mistake now is easier than defending an HMRC review later.