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Construction – when does zero-rating apply?

The construction of a property can be expensive…even more so if VAT is added to the price.

However the construction of a building is zero-rated when it is:

  • designed as a ‘dwelling’
  • used solely for a ‘relevant residential purpose’
  • used solely for a ‘relevant charitable purpose’

Before we expand on what this all means, it makes sense to outline the extent to which the zero-rate applies.  It can apply to services supplied in the course of construction of the building prior to completion and any goods that are incorporated into the building that are not specifically excluded from the zero-rating (e.g. carpet, white goods etc.). The supply of architectural, surveying, consultancy and supervisory services is always standard rated, regardless of the VAT liability of the building work.  Certain services closely connected with construction can also qualify for zero-rating, for example demolition, site security.

Where the construction is for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’ the contractor must hold a valid certificate to zero-rate their supplies.  This certificate is issued by the customer of the zero-rated works. This certificate does not extend to supplies made by subcontractors and therefore their supplies to the contractor are standard rated.


A building is ‘designed as a dwelling’ where the following conditions are met:

  • the dwelling consists of self-contained living accommodation (kitchen, bathroom, sleeping area and living area)
  • there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling (moving to another dwelling must involve moving across an area outside the dwelling e.g. corridor)
  • the separate use or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; and
  • statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

There have been numerous cases over the years on whether something has been designed as a dwelling, for example an artist’s studio in the grounds of a house was found to qualify for zero rating but the construction of a ‘granny’ annexe did not as it was restricted as to its use.

Zero-rating also applies to a house in multiple occupation.

Relevant Residential purpose

A building is used for a ‘relevant residential purpose’ if it is used as:

  • a home providing residential accommodation for children
  • a home providing residential accommodation to those with personal care needs due age, disablement, dependence on alcohol or drugs or mental disorder
  • a hospice
  • residential accommodation for students or school pupils
  • residential accommodation for members of any of the armed forces
  • a monastery, nunnery or similar establishment, or
  • an institution which is the sole or main residence of at least 90% of its residents (but not a prison, hospital, hotel etc)

As zero-rating for buildings used for a relevant residential is based on use rather than design, in some instances the buildings constructed may qualify as a dwelling as well.  Where this applies the business can choose which provision it will use for zero-rating.  This can be important regarding future use of the building and the potential VAT charge for change of use.

Relevant Charitable purpose

A building is used for a relevant charitable purpose if it is used:

  • Otherwise than in the course or furtherance of business, or
  • As a village hall or similar in providing social or recreational facilities for a local community

Zero-rating can also apply to an annexe to be used for a relevant charitable purpose as long as:

  • It is capable of functioning independently from the existing building; and
  • The annexe and the existing building each has its own independent main access.

It is important to note that this relief extends to entities recognised by HMRC as a charity for tax purposes in addition to registered charities.

Otherwise than in the course of furtherance of business

A building is used otherwise than in the course of furtherance of business if the building is not used to generate ‘business’ income. For VAT purpose income is considered to be ‘business’ if payment is made for a service provided and there is a direct and immediate link between the payment received and the supply made. For many charities, the majority of income received will be considered ‘non-business’ because the service offered is made for no payment, they are instead funded by grants, donations or fundraising proceeds.  Examples of buildings used for non-business purposes given by HMRC include places of worship, school buildings and scout huts.  However it can also apply to schools or nurseries that either do not charge a fee or charge a nominal fee and rely on donations.

As a village hall or similar

For a building to be classed as a village hall or similar there must be a high degree of local community involvement in the operation of the building and a wide variety of activities for recreational, social and sporting purposes carried out in the building.  However, this is quite subjective and there is a significant amount of case law in this area which has looked at whether sports clubs, pavilions and theatres can qualify.

Charitable Annexe

An annexe is considered to be a structure that is attached to an existing building but in a way that is not considered an extension.  Typically any additional building would be considered an extension if it made the existing space bigger to provide more space for the same use.  An annexe would provide more space for a different use.  HMRC use the term ‘distinct from but associated with the activities carried out in the existing building.’  The key point is to ensure that the are independent both in terms of access and operation.  This could be a nursery attached to a school or church.


An unexpected VAT bill could be a significant financial burden especially in the charity and health sector as they cannot claim this VAT back. It is always advisable to take VAT advice before construction work commences to see whether it is possible to obtain zero-rating for the project.

We have a wealth of experience with dealing with construction projects and would be happy to discuss your development with you to see whether you would qualify for VAT relief.

If you would like more information or you would like to discuss how we can help you please call our VAT partner, Alison Birch.

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Strength in Numbers January 2019