VAT News

When are certificates required to allow for VAT zero-rating on construction?


If you construct a new “qualifying” building you may be able to zero-rate the supply. This will save VAT from being incurred on the construction services. A qualifying building is one that is:

  • designed as a dwelling or number of dwellings;
  • intended to be used solely for a relevant residential purpose (“RRP”); or
  • intended to be used solely for a relevant charitable purpose (“RCP”).

There is no requirement to hold a certificate for zero-rated supplies in connection with dwellings, but where all or part of a building is for use solely as a RRP or RCP, a certificate is required in order for the contractor to zero-rate the supply.  Please note, HMRC recognise that the term “solely” can incorporate an appropriate de minimis margin and will therefore accept that this statutory condition is satisfied if the relevant use of the building (for RRP and RCP) is 95% or more.

The contractor cannot zero-rate the supply until the customer has provided a certificate and this should usually be provided prior to the supply being made, although it is at the contractor’s discretion to possibly accept a belated certificate. If you know from the outset that the construction is for use for a RRP or RCP, our advice is to always provide the contractor with a certificate before the works commence if possible.

Does the zero-rating extend to subcontractors?

In respect of buildings intended to be used solely for RRP or RCP, the supply of construction work can only be zero-rated when it is made to the person who intends to use the building (or the part which qualifies for zero rating) for such a purpose. The main effect of this is that, whilst the main contractor can zero-rate their construction services (and, in some cases, materials) on such a building, a subcontractor must standard rate all supplies to the main contractor.

The rules for buildings designed as dwellings are slightly different as they allow for subcontractor’s supplies to be zero-rated. There is essentially no rule that says the services must be supplied to the person who will use the dwelling, unlike the above rule for RRP and RCP.

Some buildings may be considered to qualify as both RRP and Dwellings – so clarity is important.

What does the certificate look like?

There are two instances whereby certificates may be required to zero-rate supplies associated with new qualifying buildings. The first one confirms that you are eligible to receive zero-rated supplies in the course of the actual building works, or the second confirms that your onward supply of an interest in that building (i.e. once all the works are complete) may be zero-rated.

Templates detailing what information must be included in the certificates can be found within HMRC’s VAT Notice 708 (paragraph 18) here.

Incorrect certificates

If you provide an incorrect certificate you may be liable to a penalty equivalent to the amount of VAT thereby undercharged. The penalty may be appealed against on the grounds of reasonable excuse, but this must be clearly demonstrated by the taxpayer in order for HMRC to agree and withdraw the penalty.

This is an important topic within VAT that we often see has been dealt with by the taxpayer incorrectly. It’s an area of particular concern for charities and businesses involved in VAT Exempt activities. If you have any questions on this that apply either retrospectively or on planned development projects, please contact a member of the Centurion VAT team on 01633 415390 or

Centurion VAT offer an independent and expert source for VAT advice.  Based in Wales we work across the UK and have overseas clients who need VAT advice and support when setting up in the UK.

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