VAT on building work: 0%, 5%, or 20%? A decision tree for small builders

A mate of mine spent last winter converting an old corner shop into two flats. Cracking job, proper bit of work. Then his accountant rang him after he'd already sent the quote, asking why he'd put 20% VAT on the whole lot. Turned out the conversion qualified for the 5% reduced rate, and he'd overcharged the client by the best part of six grand.

The client had done their own homework. They'd seen the words "reduced rate" somewhere and asked the question. It got awkward. He got the quote out again, but the trust had taken a knock before a single wall came down.

VAT on building work isn't one number. It's three, and which one applies depends on what you're doing and to what kind of building. Get it right and you can win jobs on price. Get it wrong and you either eat the difference or have an awkward chat with a customer who's read the same HMRC page you should have.

The three rates, quickly

HMRC sets one of three rates on any piece of building work. The whole job, or sometimes parts of it, fall into one of these:

• 0% (zero rated), where you charge no VAT at all. Mainly new build homes and certain energy-saving work.
• 5% (reduced rate), the rate most builders forget exists. Conversions and long-term empty homes.
• 20% (standard rate), the default. Most repairs, maintenance, and improvements to a home someone already lives in.

The full detail lives in HMRC VAT Notice 708, Buildings and construction. It's long and it's dry, but it's the document HMRC will hold you to, so it's worth knowing where the rates sit. None of this matters until you're VAT registered, which is compulsory once your turnover passes the threshold (£90,000 as of 2026) and optional below it.

0% (zero rated): new builds and energy-saving work

Zero rated means the rate of VAT is nil. You don't add VAT to the invoice, the customer pays nothing extra, and crucially, if you're VAT registered you can still reclaim the VAT you paid on the materials that went into the job. That's the difference between zero rated and exempt, and it matters.

Building a new dwelling

Construction of a new house or flat from the ground up is zero rated. Your labour is 0%, and the building materials you supply as part of the build are 0% too. This is one of the biggest reasons new build prices look the way they do.

Watch the edges. It has to be a genuine new dwelling, not an extension or a near-total rebuild that keeps an existing wall standing because the planners told you to. New build commercial property, an office or a shop, is standard rated at 20%, not zero. And work for a charity or a relevant residential building (a care home, student halls) can be zero rated but needs a certificate from the customer first.

Energy-saving materials

Fitting energy-saving materials in residential property is zero rated until 31 March 2027 across England, Scotland, and Wales. That covers insulation, solar panels, heat pumps, draught stripping, and similar. After that date it's due to drop back to the 5% reduced rate. Northern Ireland has its own position, so check before quoting there.

5% (reduced rate): conversions and empty homes

This is the rate that gets missed, and it's the one that cost my mate his afternoon. The 5% reduced rate is real money off a customer's bill, and being the builder who knows about it makes you look like you've done this before.

Changing the number of dwellings

If your work changes how many self-contained homes a building contains, the qualifying work is charged at 5%. Turning one house into two flats. Turning two flats back into one house. Converting a building that was never a home (a barn, a shop, an old chapel) into residential use. The reduced rate applies to the conversion work, both labour and the materials you supply.

Renovating a long-term empty home

If a dwelling has been empty for two years or more immediately before you start, renovating or altering it qualifies for 5% instead of 20%. You need evidence the place was genuinely empty. A letter from the local authority's empty homes officer is the cleanest proof, or council tax records showing no occupation. Keep that paperwork with the job file, because HMRC can ask for it.

20% (standard rate): the default for most jobs

If a job doesn't fit one of the 0% or 5% boxes above, it's 20%. For most small builders, most of the time, that's where you are.

Standard rated work includes repairs and maintenance, extensions to an existing occupied house, loft conversions that don't create a separate dwelling, a new kitchen or bathroom, redecorating, a patio, a driveway, a garden wall. All the bread-and-butter domestic work that keeps a two to six lad firm going is 20%.

The thing to hold onto: 20% is the safe default. If you're unsure and you can't get it confirmed in time, charging 20% never lands you with an underpayment bill from HMRC. It might make your quote less competitive, but it won't get you fined. Charging 5% on a job that should've been 20% is the dangerous direction.

A worked example: house into two flats

Say you're converting a two-storey terraced house into two self-contained flats. The work changes the number of dwellings from one to two, so the qualifying conversion work is reduced rated at 5%.

Your price for labour and materials, before VAT, is £48,000. Here's the difference the right rate makes:

Same work, same materials, same profit to you. The only thing that changed is that you knew the job qualified for 5% and you priced it properly. To the customer, you've just saved them £7,200 against a builder who quoted 20% out of habit. That's the kind of detail that wins the job and gets you the next one by word of mouth.

One more on the new build side. If you build a new house and the net value is £200,000, at zero rating you charge £0 VAT, so the customer pays £200,000. If you're VAT registered you still reclaim the VAT on the bricks, timber, and everything else you bought in. Zero rated work doesn't mean you swallow the input VAT. You get it back.

The reverse charge is not a rate

This trips people up, so it's worth being clear. The domestic reverse charge for construction changes who pays the VAT over to HMRC. It does not change the rate.

On a reverse charge job, you don't charge VAT to the customer at all. Instead the customer (the contractor up the chain) accounts for it directly to HMRC. But the rate behind it is still 0%, 5%, or 20% depending on the work. So the order is always the same: work out the rate using everything above, then decide whether the reverse charge applies on top.

The reverse charge only bites on VAT-registered, CIS-registered business-to-business work. It doesn't apply when you're working for a homeowner. If any of that is new to you, read the full breakdown in our guide to domestic reverse charge VAT for construction before your next subcontract invoice goes out.

The decision tree, step by step

When a new job comes in, run it through this in order. Stop at the first one that fits.

1. Are you building a brand new dwelling from scratch? If yes, it's zero rated (0%). Stop here.
2. Are you fitting energy-saving materials in a home, before 31 March 2027? If yes, 0% for now. Stop here.
3. Does the work change the number of self-contained dwellings, or convert a non-residential building into a home? If yes, 5% on the qualifying work. Get it confirmed in writing.
4. Has the property been empty for two years or more before you start? If yes, 5%, with evidence of the empty period on file.
5. None of the above? It's standard rated, 20%.

Then, separately: is this VAT-registered business-to-business work under CIS? If yes, the domestic reverse charge probably applies, so the customer accounts for the VAT instead of you, at whatever rate you landed on above.

What NOT to do (the 5 common mistakes)

1. Don't charge 5% on a hunch. The reduced rate has specific conditions and HMRC can claw back the shortfall from you, not the customer, plus interest. If you can't confirm it before the quote, charge 20% and adjust later once it's confirmed.
2. Don't assume a near-total rebuild is a new build. Keeping one façade standing because the planners insisted usually keeps the job standard rated, not zero rated. The line between "new dwelling" and "big alteration" is narrower than it looks.
3. Don't forget the empty-home evidence. The 5% empty property rate stands or falls on proof. No letter from the council or council tax history means no defence if HMRC asks. Get the paperwork before you start, not after.
4. Don't mix up the reverse charge with the rate. Reverse charge tells you who pays HMRC. The rate tells you how much. Two separate questions. Answer them in that order.
5. Don't guess and stay silent. If a job sits in the grey area between two rates, a five-minute call to your accountant or the HMRC VAT helpline is cheaper than getting it wrong on a £48,000 job. Asking the question is not a sign you don't know your trade. It's a sign you run a tidy business.

Why this is worth getting right

Most builders charge 20% on everything because it's the safe default, and on most jobs that's correct. But the firms that know when 5% or 0% applies quote sharper on exactly the jobs where margins and competition are tightest: conversions, empty-home renovations, new builds. Knowing the rate isn't tax trivia. It's a number on your quote that the customer compares against the next builder's.

Keep the rate visible on every quote and invoice, with the net, the VAT, and the gross set out plainly. Customers trust a price they can see the working on. TradeStash lets you set the VAT rate per job and shows the breakdown on the quote in a couple of taps from the van, so the right number goes out the first time and you're not redoing it after a phone call from the accountant.

This guide is general information, not tax advice. VAT rules change and the detail of any job matters, so confirm your position with your accountant or HMRC before you quote.