The jobs where charging 20% VAT loses you the bid

You quote a barn conversion at £60,000 plus VAT and price the VAT at 20%, because that is what has gone on every quote since you registered. The builder who gets the job prices the same £60,000 at 5%. Your customer is looking at £72,000 and theirs is looking at £63,000, and the £9,000 between you is not margin you gave away. It is a rate you were entitled to charge and did not.

UK construction has four VAT positions running at once: 0%, 5%, 20%, and the domestic reverse charge, which is not a rate but changes who hands the money to HMRC. Which one applies is decided by the building and the work, not by who you are or how you invoice.

This page is how to tell on sight, with the statute and the paragraph of VAT Notice 708 beside each one, the evidence to collect before you price, and the arithmetic done in pounds.

How builders describe the problem

The people on the other side of the quote notice this before you do. A self-builder on BuildHub, opening a thread about a barn with full consent:

"I'm converting my barn with full planning, contractor is used to dealing with 0% VAT with new builds but not the 5% with conversion."

Jakekibb on BuildHub

And from a thread where a customer converting commercial premises into flats was getting a different answer from each firm that quoted:

"Showing the contractors the planning consent really should do the trick but many don't understand / don't want to take the risk."

Faz on BuildHub

"Firstly they MUST charge you 5% on labor and any materials they supply (eg the electrician if he supplies wire). If they charge you 20% your claim may be rejected by HMRC."

Temp, in the same thread

That last line is the commercial point. For a private customer, VAT charged at the wrong rate is not a timing difference they recover later. It is money gone.

The rates, on one page

Three of those are worth 20 points of price and three are worth 15. On a job of any size, that is the bid.

Zero rate: a new dwelling, built from scratch

Item 2 of Group 5, Schedule 8 zero-rates the supply of services in the course of construction of a building designed as a dwelling, together with the building materials you supply with those services. It is the most valuable rate in UK construction, and it is fenced in tightly.

The building has to be a dwelling on four tests. Note 2 to Group 5 sets them out and all four have to hold:

1. it consists of self-contained living accommodation
2. there is no provision for direct internal access to another dwelling
3. separate use or separate disposal is not prohibited by planning permission, a covenant or similar
4. statutory planning consent has been granted and the work is carried out in accordance with it

Test three is the one that catches annexes. A granny flat built with a planning condition tying its occupation to the main house is not separately disposable, so it is not a dwelling for VAT and the work is 20%. Test four is why the rate follows the approved drawings: build something the consent does not cover and the relief does not stretch to it.

The building has to be new. Note 16 says construction of a building does not include the conversion, reconstruction or alteration of an existing building, nor an enlargement or extension except to the extent that it creates an additional dwelling. Note 18 then defines when a building has stopped being an existing building, and the bar sits exactly where you would guess: demolished completely to ground level, though cellars, basements and the slab at ground level may be retained.

There is one relief valve. Where the new building makes use of no more than a single facade, or a double facade on a corner site, and that facade is retained as a condition or requirement of statutory planning consent, the rest can still be zero-rated. Retaining a handsome front wall because you like it does not qualify. Retaining it because the conservation officer wrote it into the consent does.

Professional fees stay at 20%. Architects, surveyors and anyone acting purely as a consultant or supervisor are excluded from zero rating under Notice 708 s3.4, even on a new dwelling. Design and build supplied as a single construction service is a different matter, which is one reason design and build is priced the way it is.

5%: you changed how many front doors there are

Group 6 of Schedule 7A is the reduced rate for residential conversions. Note 2(1) lists three qualifying conversions: a changed number of dwellings conversion, a house in multiple occupation conversion, and a special residential conversion. The first is the one you meet on site, and its test is blunt enough to apply while you are standing in the building.

After the conversion, the premises has to contain a greater or lower number of single household dwellings than it did before, and not fewer than one. Note 3.

That covers more than people assume:

• a barn, shop, office, chapel or pub becoming one house: nought dwellings to one, so the number changed
• a large house becoming three flats: one to three
• two flats knocked into one: two to one, and a reduction counts as much as an increase
• a house with a self-contained annexe being brought back to a single dwelling

A single household dwelling is defined at Note 4 on the same lines as Note 2 in the zero rate group: designed for occupation by a single household, self-contained, no direct internal access to another dwelling, separate use and disposal not prohibited, and consistent with the planning consent.

What falls outside the relief is the part of the job where the count did not move. Notice 708 s7.3 is explicit that where the number of single household dwellings in part of the premises is unchanged, that part sits outside. Convert the upper floors of a building into two new flats and refit the existing ground floor flat at the same time, and the two new flats are 5% while the refit of the untouched flat is 20%. Two rates, one job, one invoice, and that is ordinary.

Garage work rides along with the conversion where the garage is converted or constructed at the same time as the dwellings, under Notice 708 s7.6. Landscaping that has nothing to do with changing the number of dwellings does not.

5%: the house that has stood empty for two years

Group 7 of Schedule 7A reduces the rate on renovation or alteration of qualifying residential premises, and Note 3(2) carries the whole test: neither the premises concerned, nor, where those premises form part of a relevant residential unit, the other buildings in that unit, have been lived in during the period of two years ending with the commencement of the relevant works.

Read that as a date, because it is one. The two years run backwards from the day you start, not from exchange and not from the planning decision. A property empty since March 2024 qualifies for a start in March 2026 and does not qualify for a start in December 2025.

Note 3(3) adds a second route, and it is the one that saves the deal for a buyer who has just completed on a wreck. Where the premises had not been lived in for two years, the person acquiring them did so while they were still empty, no renovation work was carried out in that period, the supply is made to that acquirer, and the works begin within one year of the acquisition, the reduced rate holds. Your customer can move in and still get 5%, provided you start inside that year.

The evidence is ordinary and worth asking for before you price rather than after. Notice 708 s8.3 accepts Electoral Roll and Council Tax records, information from utility companies, and a letter from the local authority's Empty Property Officer. That last one is the strongest single document, because it settles the question in one page, and Empty Property Officers write them regularly. HMRC also tells you which occupation to ignore when you count the two years: illegal occupation by squatters, occupation by property guardians, and non-residential use such as storage.

There is a longer clock in the same territory, and it belongs to the developer rather than to you. Where a building has not been lived in during the ten years immediately before a sale or long lease, and after the work it is designed as a dwelling, the first grant of a major interest in it can be zero-rated under Notice 708 s5.3. Your services on that job are still 5%. Your customer's sale is 0%, which is a large part of why they can afford your quote.

Energy saving materials: 0% until 31 March 2027

Group 23 of Schedule 8 zero-rates the installation of energy saving materials in residential accommodation. In England, Wales and Scotland the zero rate has applied since 1 April 2022, and in Northern Ireland since 1 May 2023. Notice 708/6 puts the end date plainly: from 1 April 2027 these installations revert to the reduced rate of 5% under Schedule 7A Group 2.

The qualifying list covers insulation, draught stripping, central heating and hot water system controls, solar panels, wind turbines, water turbines, ground source and air source heat pumps, micro combined heat and power units, and wood-fuelled boilers. Three more came in on 1 February 2024: water source heat pumps, batteries for storing energy converted from electricity, and smart diverters. Groundworks needed to install the pipework for a ground or water source heat pump serving residential accommodation come in with the installation.

The relief is for installation. Selling a customer a heat pump over the counter is a supply of goods at 20%. Supplying and installing it in their home is 0% on the whole thing, materials included, until 31 March 2027. If you fit renewables, that date belongs in your pricing calendar, because a quote written in early 2027 for work starting in the summer crosses it.

Relevant residential and relevant charitable: the certificate comes from your customer

Constructing a new building intended for use solely for a relevant residential purpose or a relevant charitable purpose is zero-rated, and the condition attached to it is a piece of paper your customer gives you.

Relevant residential purpose under Note 4 covers homes providing residential accommodation for children, care homes for the elderly or for disabled people, hospices, residential accommodation for students or school pupils, armed forces accommodation, monasteries and convents, and an institution that is the sole or main residence of at least 90% of its residents. Hospitals, prisons and hotels sit outside it.

Relevant charitable purpose under Note 6 covers use by a charity otherwise than in the course or furtherance of a business, or use as a village hall or similarly in providing social or recreational facilities for a local community. Where the charity's business use of the building comes to no more than 5% of the total, HMRC's de minimis at Notice 708 s14.7 lets you ignore it and treat the use as solely charitable.

Note 12 requires the certificate to be in the form specified in a notice published by HMRC, and that wording sits in Notice 708 s18. Three things about it are worth fixing into your process:

• your customer issues it, not you. The person who will use the building for the qualifying purpose certifies the intended use. You hold it as your evidence for the rate.
• it has to be in your hands in time. Take the certificate at the start of the job rather than chasing it at practical completion, and hold it before you invoice at the relief rate.
• the liability for a wrong certificate follows the person who signed it. Section 62 of the Value Added Tax Act 1994 puts the penalty on the issuer of an incorrect certificate. That is why you can price a hospice extension at 0% with a straight face once the certificate is on file.

Converting premises into a building used solely for a relevant residential purpose is the special residential conversion at 5% under Notice 708 s7.5, and it needs a certificate too. Where a building is part dwelling and part something else, an hour with an accountant who does construction VAT before you quote is the cheapest hour on the job.

The goods you fit that stay at 20%

The relief runs to building materials, which Note 22 defines as goods of a description ordinarily incorporated by builders in that kind of building. Four categories sit outside that definition whatever you do with them, and Notice 708 s13 lists them:

• finished or prefabricated furniture, other than kitchen furniture
• materials for the construction of fitted furniture, other than kitchen furniture
• most electrical and gas appliances, with exceptions for space and water heating and ventilation
• carpets and carpeting material

Fitted kitchen units are building materials. A fitted wardrobe in the master bedroom is not. The integrated oven and hob are appliances. The vinyl or the tiles you lay are building materials, and the carpet you lay next to them is not.

Article 6 of the Value Added Tax (Input Tax) Order 1992, SI 1992/3222, then closes the other end. A person constructing a zero-rated dwelling cannot deduct input tax on goods they incorporate that are not building materials. So £6,000 of appliances and carpets on a new house costs you £7,200, and the £1,200 stays where it lands. Put it in the quote as a cost rather than finding it on the VAT return.

The £60,000 conversion, worked end to end

A three-bay barn with consent to become a single dwelling. Your price is £60,000 net: £38,000 labour, £14,000 of materials you supply with the conversion work, and £8,000 of landscaping and a new driveway, which has nothing to do with changing the number of dwellings.

The builder who prices the whole £60,000 at 20% quotes £12,000 of VAT and a gross of £72,000. The gap is £7,800. Take the landscaping out and do it as a separate job later and the gap does not move: the conversion element is £52,000, £10,400 of VAT at 20% against £2,600 at 5%, the same £7,800. The landscaping carries 20% either way, so it never was part of the gap.

The customer here is a private individual converting the barn to live in. They recover none of that VAT through a return, so the £7,800 is not a timing difference to them. It is the price, and it is the reason the quote at 5% wins.

Run the same logic on a new build and the numbers get larger. A £250,000 new dwelling zero-rated is £250,000. Standard-rated by mistake it is £300,000, and the correction is a credit note and an awkward conversation about who is short of £50,000 while the money sits with HMRC.

Why your customer is watching this closely

A private individual building a new house or converting a non-residential building to live in can recover VAT through the DIY Housebuilders Scheme, using form VAT431NB for a new build and VAT431C for a conversion. For work completed on or after 5 December 2023 they have six months from finishing to claim.

What the scheme returns is VAT that was correctly charged. A 20% invoice on a job that qualified for 5% does not become recoverable because it was paid in good faith, which is what the BuildHub post above is warning about when it says the claim may be rejected. The customer who understands this asks about your VAT rate at the quote stage, and the answer decides who they ring back.

The paperwork that lets you hold the rate

Every rate above is one you can defend, provided three or four ordinary documents were collected before you started.

Four documents, gathered at quote stage, are what turn "I think this one might be 5%" into a price you can put in front of a customer and hold when they ask you to justify it.

What the rate does to your invoice

The domestic reverse charge under section 55A of the Value Added Tax Act 1994 applies to standard rated and reduced rated construction services between VAT-registered businesses where the payment is reportable under CIS. Zero-rated supplies sit outside it.

So the two reliefs behave differently on the paperwork. A zero-rated new build subcontract is invoiced the ordinary way, with VAT shown at 0%. A 5% conversion subcontract for a VAT-registered contractor goes reverse charge: you show the 5% rate, exclude the VAT from the total, and your customer accounts for it to HMRC. The rate decision and the reverse charge decision are two separate questions asked in that order, and the mechanics of the second are in the reverse charge guide.

What it costs

There is no monthly subscription on AEC Stack. The platform fee is 2.5% of each invoice processed through the platform, collected on the payment due date, so a quiet month costs nothing.

Set the VAT rate per line rather than per invoice. The barn conversion above needs two rates on one document, and a single-rate invoice quietly pushes you into whichever one you set first.

Take the next quote sitting on your desk and ask the two questions that decide the rate: is the building new, and did this work change how many dwellings the premises contains. If either answer is yes, or if the place has stood empty for two years, ask your customer today for the plans or the Council Tax history. Then set your invoicing up so the rate travels with the line rather than the document, starting here.