Which construction works qualify for zero rate VAT?

VAT Zero Rate applies to a variety of construction works

Are you sure the law is on your side?

It’s fairly widely known that the VAT Zero Rate applies to a variety of construction works. However, like many areas where VAT liability is an issue, it pays to be very clear on the legal basis for the relief. Not only will this ensure your project is VAT efficient, it will ensure that you have peace of mind. By fully complying you avoid the risk of HMRC imposing penalties where errors are made.

Which construction works qualify for zero rate VAT?

You may be able to zero-rate the supply of construction services if you are involved in constructing a ‘qualifying building’. A qualifying building can be:

  1. A building ‘designed as a dwelling’
  2. A building that will be used solely for a ‘relevant residential purpose’
  3. A building that will be used solely for a ‘relevant charitable purpose’

You can read more about the definitions of the above in Real Estate Matters Issue 9

Construction services in categories 2 and 3 (relevant residential or charitable use) require the final customer to give a certificate supporting that use, allowing the main contractor to zero-rate the work to the customer. However, subcontractors cannot obtain the certificate and therefore, they must charge VAT at the standard rate to their main contractor.

Student accommodation

However, what happens if the works relate to the construction of student accommodation (a relevant residential purpose) which is also ‘designed as a dwelling’?

That was the question raised in a recent Upper Tribunal hearing, in a case taken by our member firm MHA MacIntyre Hudson called Summit Electrical Installations Limited. The Tribunal found that the accommodation being built in Leicester met the test of a dwelling (defined right), as well as the relevant residential purpose test (also defined right).

The Tribunal held the view that the fact that the accommodation qualified as a dwelling in its own right took precedence over the relevant residential purpose point. That allowed Summit – and all other subcontractors – to zero rate their works on the building, without the need for a certificate from the final customer.

This article provides an overview; you should always seek professional advice. Please get in touch on 01903 234094 for advice specific to your project.