VAT on Building Work: 0%, 5% or 20%? The Complete UK Guide

You get three quotes for a kitchen extension. Two come in at £48,000. The third says £40,000. Bargain - until you realise the first two include VAT and the third doesn't.

In short: VAT on building work is charged at 0% for new-build homes, 5% for qualifying conversions and renovations of long-empty properties, and 20% for most other work. Whether your builder charges VAT at all depends on whether they're VAT-registered - which is based on their annual turnover exceeding £90,000.

That £8,000 difference isn't a discount. It's a tax bill waiting to land on you. Understanding which VAT rate applies to your project - and whether your builder should be charging it - can save you thousands.

The three VAT rates on building work

There are three possible VAT rates for residential construction in the UK. Which one applies depends on what's being built, and the history of the property.

20% - Standard rate

This is what most homeowners pay. If you're extending, renovating, or improving an existing home that's been lived in, the work attracts 20% VAT.

Examples:

• Kitchen or bathroom refurbishment
• Single or double-storey extension
• Loft conversion
• New roof on an existing house
• Rewiring, replumbing, new heating system
• Landscaping and driveways

If your builder is VAT-registered, they must charge 20% on top of their labour and materials. There's no way round it.

5% - Reduced rate

The reduced rate applies to specific types of work, mainly involving properties that have been empty or are changing use. It's less well-known, and builders sometimes miss it - or charge 20% when they shouldn't.

The 5% rate applies when:

• Renovating a property empty for 2+ years - the property must have been unoccupied for at least two years before work starts. You'll need evidence: council tax records, utility disconnection dates, or a letter from the local authority.
• Converting a non-residential building to residential - turning a barn, office, or shop into a home qualifies for 5% VAT on the conversion work.
• Converting a house into flats (or vice versa) - changing the number of dwellings in a building qualifies.
• Installing energy-saving materials - insulation, solar panels, heat pumps, and draught stripping attract 5% VAT when installed in residential properties (0% until March 2027 under the current temporary relief).

On a £60,000 renovation, the difference between 20% and 5% VAT is £9,000. That's worth checking.

0% - Zero-rated

Zero-rating applies to the construction of brand-new dwellings. If you're building a new house from scratch on a fresh plot, the construction work is zero-rated for VAT purposes.

This covers:

• New-build houses and flats
• Construction of an annexe that's a self-contained dwelling (with its own entrance, kitchen, bathroom, and sleeping area - and where planning conditions don't prevent separate use)

Zero-rating doesn't mean "no VAT." It means VAT is charged at 0%. The distinction matters because the builder can still reclaim VAT on their own purchases. It's a tax mechanism, not an exemption.

Important: zero-rating only applies to genuinely new buildings. Extending an existing house - even substantially - is standard-rated at 20%.

The VAT registration threshold

Not every builder charges VAT. They only have to if their taxable turnover exceeds £90,000 in any rolling 12-month period (the threshold as of April 2024).

A sole trader turning over £80,000 a year doesn't need to register for VAT and won't charge it. A larger firm turning over £300,000 must be registered and must charge VAT on everything.

This creates a genuine price difference. A non-VAT-registered builder can quote £40,000 for a job that a VAT-registered builder would quote at £48,000 (£40,000 + £8,000 VAT). The actual cost of doing the work might be identical - one just has the tax on top.

Is cheaper always better?

Not necessarily. Some things to consider:

• Size and capacity - builders below the VAT threshold tend to be smaller operations. That's not a problem, but check they have the resources for your project.
• Deliberate threshold management - some builders artificially keep turnover below £90,000 to avoid registering. This might mean they take on fewer jobs or use subcontractors to split the income. It's legal but worth understanding.
• Cash-in-hand red flags - if a builder offers a "discount for cash" or quotes suspiciously low, they might be avoiding VAT they should be charging. If HMRC investigates and the builder should have been registered, you could be caught up in it. See our guide on paying builders cash for more on this.

What your quote should show

A properly presented quote from a VAT-registered builder should show:

• Net cost - the price of labour and materials before VAT
• VAT amount - calculated at the applicable rate (0%, 5%, or 20%)
• Gross total - what you actually pay
• VAT registration number - this should be on every invoice and quote from a registered business
• VAT rate applied - especially important if the reduced rate applies

If a quote just says "£48,000 including VAT" with no breakdown, ask for the split. You need to know whether VAT is included, what rate has been applied, and whether that rate is correct.

For a full breakdown of what else should be in a quote, see our guide on what a builder's quote should include.

Common VAT mistakes on builder quotes

1. Charging 20% when 5% applies

This is the most common error. If you're renovating a property that's been empty for two or more years, the work should be charged at 5%, not 20%. Some builders don't know about the reduced rate. Others apply 20% because the paperwork for 5% is more involved.

If you think the reduced rate applies, raise it with the builder before work starts. They'll need evidence of the property's empty status, and they should issue VAT invoices at the correct rate. You can't claim it back retrospectively if the builder has already charged 20%.

2. Not showing VAT at all

If a builder is VAT-registered and their quote doesn't mention VAT, ask whether the price is inclusive or exclusive. A quote of £50,000 that turns into £60,000 once VAT is added is a nasty surprise.

3. Mixing up labour and materials

VAT applies to both labour and materials supplied by the builder. If a builder charges VAT on materials but not labour (or vice versa), that's wrong. It's all or nothing.

The only exception is if you buy materials yourself and the builder only supplies labour. In that case, VAT applies to the labour charge only. But the builder still charges VAT on that labour if they're registered.

4. Claiming zero-rating on extensions

An extension to an existing house is not zero-rated. It doesn't matter how big the extension is or whether it doubles the size of the house. Only genuinely new dwellings qualify for zero-rating. If a builder tells you your extension is zero-rated, they're wrong.

5. Forgetting the DIY Housebuilders' Scheme

If you're building a new home yourself (or managing subcontractors directly), you can reclaim VAT on materials through HMRC's DIY Housebuilders' Scheme. You claim after the project is complete, and you'll need to keep every receipt. The claim must be made within six months of the building being completed.

How VAT affects your total budget

On a typical project, VAT is a significant chunk of the total cost:

If the reduced rate applies, those VAT figures drop dramatically:

These aren't small numbers. Getting the rate wrong - or not checking - can blow your budget.

Checking your builder's VAT status

If a builder claims to be VAT-registered, you can verify their registration number on the HMRC VAT registration checker. If they claim not to be registered, and their prices seem low, consider whether their turnover genuinely falls below the threshold. A busy builder running a team of four and working year-round is unlikely to be under £90,000.

You're not the VAT police, and it's not your responsibility to audit your builder's tax affairs. But if something doesn't add up, it's worth asking the question - especially if the quote feels too good to be true. Our guide on signs your builder is overcharging covers other pricing red flags.

The CIS (Construction Industry Scheme)

You might hear about CIS if your builder uses subcontractors. The Construction Industry Scheme requires contractors to deduct tax from payments to subcontractors. This doesn't directly affect you as a homeowner - it's between the contractor and their subbies - but it's worth knowing it exists.

CIS deductions are not VAT. They're income tax deductions. If a builder mentions CIS on your invoice, it shouldn't change what you pay.

Summary: which rate applies to your project?

If you're unsure which rate applies, ask your builder and cross-check with HMRC's guidance. Don't just accept whatever rate appears on the quote.

Got a quote? Check the numbers

A quote that doesn't properly account for VAT is a quote that's hiding part of your costs. Upload your quote to MyBuildAlly and we'll flag whether VAT is shown correctly, whether the rate looks right for your project type, and whether the total adds up.

Sources

• HMRC: VAT for builders - official guidance on VAT rates for construction
• HMRC: VAT notice 708 - buildings and construction - detailed technical guidance on zero-rating and reduced rates
• HMRC: DIY Housebuilders' Scheme - how to reclaim VAT on self-build projects
• HMRC: VAT registration threshold - current threshold and registration requirements
• HMRC: Check a UK VAT number - verify a builder's VAT registration