VAT for Construction Companies: What you need to know

What is VAT?

VAT, or Value Added Tax, is a tax levied on the sale of goods and services in the UK. The standard rate of VAT is 20%, which is applied to most goods and services. However, there are some exceptions, such as for food and children’s clothing, which are taxed at a lower rate. Construction companies in the UK are required to charge VAT on their services.

If you are a construction company in the UK, it is important to be aware of the rules and regulations surrounding VAT. Failure to comply with these rules can result in hefty fines. Here are some things you need to know about VAT for construction companies:

• Construction companies must register for VAT if their annual turnover exceeds £85,000.
• Construction companies must charge VAT on all invoices issued to customers.
• Construction companies can reclaim VAT on any materials or services purchased from suppliers that are used for business purposes.
• Construction companies must submit a quarterly VAT return to HMRC detailing all income and expenditures relating to VAT.

By following these simple rules, construction companies can ensure that they remain compliant with UK VAT laws.

Do construction companies pay VAT?

As of 1st March 2021, a VAT-registered subcontractor no longer charges VAT for certain construction services rendered to another VAT-registered firm. With the Reverse Charge model, customers are responsible for “self-accounting” for any VAT that may be owed. Construction companies do not pay VAT. However, they may be required to charge and collect VAT on the supplies of goods and services they make to their customers. 

VAT on construction services provided by subcontractors is usually accounted for using the Reverse Charge mechanism. This means that the customer (the main contractor) is responsible for accounting for any VAT that may be due rather than the subcontractor. The customer will then pay the VAT to HMRC.

How does VAT work for construction companies in the UK?

Value Added Tax (VAT) is a consumption tax levied on most goods and services in the European Union (EU). In the UK, VAT is levied at 20% on most products and services, with some exceptions. Construction companies in the UK are required to register for VAT if their turnover exceeds £85,000 in a 12-month period. Once registered, construction companies must charge VAT on all taxable supplies of goods and services.

In most cases, construction companies can recover the VAT they have paid on purchases of goods and services used for business purposes. This is known as ‘input tax’. If a construction company is VAT-registered, it can choose to invoice customers, including VAT or excluding VAT. A company must pay the VAT to HMRC if it invoices including VAT. If a company invoices excluding VAT, the customer pays the VAT to HMRC. Different rules apply to construction work carried out under certain government contracts. 

For more information, please see HMRC’s guidance on construction industry schemes.

Does VAT apply to construction?

VAT applies to construction in the same way as it does to any other sector. The main difference is that construction companies can register for what’s called the ‘Construction Industry Scheme´(CIS). This allows them to reclaim the VAT they’ve paid on materials and services used in construction projects.  If you’re registered for CIS, you’ll need to charge your customers VAT at the standard rate of 20%. You’ll then pay this money over to HMRC, but you can reclaim it when you file your VAT return. 

If you’re not registered for CIS, you can still charge VAT on your construction services. However, you won’t be able to reclaim any of the VAT you’ve paid out on materials and services.  In either case, it’s important to keep good records of all the money you’ve spent on construction projects so that you can correctly calculate how much VAT you owe (or are owed).

What are the benefits of VAT for construction companies in the UK?

When it comes to value-added tax (VAT), construction companies in the United Kingdom can benefit in a number of ways. For starters:

VAT can be used as a way to reduce the overall cost of materials and supplies:

This is because many construction companies are able to claim back the VAT they have paid on purchases. In addition, construction companies can also use VAT to help finance projects. By using VAT-eligible invoices, construction companies can receive payments from the government that can be used to cover the cost of materials, labour, and other expenses.

VAT can also be used to improve cash flow:

Since construction companies are often paid in stages, VAT can provide a much-needed infusion of cash during the early stages of a project. This can help to cover the cost of materials and other expenses and can also help to keep the project on schedule.

VAT can help to level the playing field for small construction companies:

In many cases, small construction companies are at a disadvantage when competing against larger firms. This is because larger firms are often able to claim back a greater portion of their VAT payments. As a result, smaller construction companies can use VAT to their advantage by claiming back a larger portion of their own VAT payments.

In short, there are a number of benefits that construction companies can enjoy by taking advantage of VAT. By claiming back VAT payments, construction companies can reduce their overall costs, improve their cash flow, and level the playing field against their larger competitors.

What are the disadvantages of VAT for construction companies in the UK?

There are a few potential disadvantages of VAT for construction companies in the UK. One is that it can be a complicated tax to understand and comply with. This can lead to errors and potential fines from HMRC, which is why it’s important to outsource your business accounting. 

Additionally, VAT can add to the cost of materials and services, which can eat into profits. And construction companies might find themselves at a competitive disadvantage if their competitors are based in countries with lower VAT rates.

**If you need it, our firm can help you with everything VAT-related!

How can construction companies in the UK minimize their VAT liability?

There are a number of ways that construction companies in the UK can minimize their VAT liability. One way is to correctly account for VAT on all purchases and sales. Another way is to claim back any VAT paid on purchases that are used for business purposes. Additionally, construction companies can register for the Flat Rate Scheme, which allows them to pay a fixed rate of VAT on their turnover, regardless of how much VAT they actually incur.

VAT can also be minimized by careful planning and management of VAT-able transactions. For example, construction companies can stagger their purchases so that they only incur VAT on materials when they are actually needed, rather than paying VAT upfront on materials that may not be used for several months. Additionally, construction companies can structure their contracts in such a way that VAT is only charged on the work carried out rather than on the full value of the contract.

What is the VAT rate for construction?

The VAT rate for construction companies in the UK is 20%. This is a relatively high rate compared to other countries, but it is still lower than the standard rate of VAT in the UK, which is 20%.

Construction companies can also claim back VAT on certain materials and services that they purchase, which can help to offset the high rate.

What building work qualifies for 5% VAT

Under the current UK VAT rules, construction work on new buildings and certain types of renovations qualify for a reduced rate of 5%. This includes most types of building work, such as:

• erecting new buildings
• converting existing buildings into homes
• carrying out major repairs to listed buildings
• installing or extending heating, lighting, ventilation, or air-conditioning systems.

To qualify for the reduced rate of VAT, a registered VAT builder must carry out the construction work. The builder must also have been granted planning permission by the local authority. If the work does not meet these requirements, it will be subject to the standard 20% rate of VAT.

New vat rules 2021 construction 

Construction companies in the United Kingdom have new VAT for construction company rules that came into effect in 2021. The changes, which were announced in the Budget last year, will see the VAT rate on construction services increase from 20% to 21%.

The new VAT rate will apply to all construction services, including those relating to new build properties, renovations, and repairs. It is expected to raise around £1.5 billion for the government over the next five years. The government has said that the additional revenue will be used to invest in infrastructure projects across the country. However, many construction companies are concerned about the impact the new VAT rate will have on their businesses. Construction is a highly competitive industry, and margins are often tight. The additional cost of VAT could make some construction projects unviable and lead to job losses in the sector.

The government has said that it is aware of these concerns and is working with the construction industry to mitigate the impact of the new VAT rate. However, it remains to be seen how effective these measures will be. In the meantime, construction companies need to ensure they are aware of the changes and how they will affect their business.

New vat rules 2022: VAT on building materials

The UK construction industry is set to be hit by new VAT rules from 1st January 2022. The changes, which were first announced in the 2020 Budget, will see the standard VAT rate applied to labour and materials used to construct new buildings and homes. HMRC has produced Revenue and Customs Brief 5 (2022) in response to the well-publicized delays in processing VAT group applications. This brief release details the steps that businesses and organizations should take in the meanwhile. 

Whether or not the VAT group applicants must take any more steps depends on whether or not they are already VAT registered. Because of the complexities involved, cash flow problems may arise when VAT refunds are due on initial expenses or capital investments. This is especially true in the context of company transactions and reorganizations.

A construction firm’s ability to correctly charge and account for value-added tax and later report via value-added tax returns is directly related to the firm’s familiarity with the advice in this area.

Reverse charge scheme for the construction industry sector

As of 1st October 2019, the construction industry sector in the UK is subject to a new Reverse Charge scheme. This means that businesses registered for VAT must account for VAT on their supplies of construction services to other businesses rather than the customer paying the VAT to the supplier. 

The main aim of the Reverse Charge scheme is to reduce VAT fraud in the construction industry, which is estimated to cost the UK government around £100 million per year. The scheme will also simplify the VAT accounting process for businesses in the construction industry, as they will no longer need to file multiple VAT returns each month.

Do you own a business registered for VAT in the UK, and do you supply construction services? It is vital you must ensure that you comply with the new Reverse Charge scheme. Failure to do so could result in heavy fines from HMRC. 

The UK’s VAT system can be complicated, but understanding how it works is essential for any construction company doing business in the country. With a little bit of research, you can ensure your VAT is in order. We can help you with keeping up to date with the changes in VAT, VAT compliance, The Reverse Charge, VAT deductions, etc.

Seek help from a professional if you need it

We hope this article has helped clarify some of the key points around VAT for construction companies. If you have any further questions, we recommend speaking to an accountant or tax advisor who can provide specialist advice tailored to your business. VAT can be a confusing topic for construction companies in the UK, but it’s important to understand the basics in order to stay compliant. Hiring an accounting firm could be the best decision for your company. Accurox is an accountant for construction companies. We would be happy to discuss your affairs in more detail and can look after your bookkeeping needs and/ or complete your VAT return for you.