Reduced-Rate and Zero-Rated VAT for Builders — Charging 5% or 0% on the Right Jobs (2026)

The Three Rates — and Why They Matter on Your Quote

VAT on construction work falls into three bands. Getting the band right is a commercial advantage as much as a compliance issue: on a £40,000 conversion, the difference between 20% and 5% is £6,000 of VAT — money that either stays in the customer's pocket or doesn't.

• 0% (zero-rated): mainly the construction of a brand-new dwelling, plus certain conversions for housing associations and charities, and some adaptations for disabled people.
• 5% (reduced-rate): the everyday opportunity for most trades — renovating long-empty homes, conversions that change the number of dwellings, and certain energy-saving installations.
• 20% (standard-rate): the default — repairs, maintenance, extensions to existing homes, and any work where you can't evidence a lower rate.

The key mental model: 20% is the fallback. A lower rate is a relief you have to qualify for and evidence. If you can't prove the conditions are met, HMRC will expect 20% — and they'll come to you for it, not the customer.

Zero-Rated (0%) Work — New Builds Mostly

Zero-rating is the most generous relief because it means no VAT at all is charged to the customer, while you can still reclaim the VAT on your inputs. It is also the most tightly defined. The main categories are:

• Constructing a new dwelling from scratch: a genuinely new build on a cleared or virgin site. Both your labour and the materials you supply with it can be zero-rated to the customer.
• Certain conversions for housing associations and charities: converting a non-residential building into a dwelling where the customer is a relevant housing association can be zero-rated rather than reduced-rated.
• New charitable or relevant residential buildings: e.g. care homes, student accommodation and certain village halls, subject to strict use conditions.
• Adaptations for disabled people: some building work to adapt a disabled person's home (ramps, widening doorways, certain bathrooms) qualifies for zero-rating with the right eligibility declaration.

Watch the boundary carefully: an extension or annexe to an existing dwelling is normally standard-rated at 20%, not zero-rated, even though it's "new" construction. Zero-rating is for new dwellings, not new additions to existing ones. Demolishing a building down to a single facade and rebuilding behind it may or may not count as a new build — these edge cases are exactly where Notice 708 and your accountant earn their keep.

Reduced-Rate (5%) Work — Where Most Trades Win

The 5% rate is the one you'll meet most often as a jobbing builder or trades business. There are three main everyday opportunities.

1. Renovating a home that has been empty 2 years or more

If a dwelling has been empty for two years or more immediately before you start work, your renovation or alteration of it can be charged at 5% rather than 20%. This is the "empty home" reduced rate, and it is a major selling point when quoting on a long-vacant property — a tired house someone has just bought to do up.

You need evidence the property genuinely qualifies — see the evidence section below. The two-year clock is about the period before work begins, so a property empty for years that someone moved into last month won't qualify.

2. Conversions that change the number of dwellings

The 5% rate applies to a "changed number of dwellings" conversion and to conversions that change the type of residential use. The common qualifying jobs are:

• Converting a single house into flats (one dwelling becomes several).
• Converting several flats back into a single house (several dwellings become one).
• Converting a non-residential building — a barn, office, pub, shop or church — into a dwelling.
• Converting a single-household dwelling into a care home, or into a house in multiple occupation (HMO) or other multiple-occupancy dwelling.

The principle is that the number or type of dwellings must change. Simply refurbishing an existing house with the same number of dwellings doesn't qualify on its own — that's standard-rated unless the empty-home rule applies.

3. Installing certain energy-saving materials

Installing qualifying energy-saving materials in residential accommodation — such as insulation, solar panels, heat pumps and certain controls — has long attracted the 5% reduced rate, and for a period some of these installations have been relieved at 0%. The exact rate and the list of qualifying materials have changed over recent years and can change again, so do not assume — check the current rate that applies on the date of your job before you quote.

No Evidence, No Relief — What HMRC Expects You to Hold

This is the part that catches trades out. The reduced and zero rates are only valid if you hold evidence the conditions are met. If HMRC inspects and you can't produce it, they will treat the supply as standard-rated and pursue you for the 20% you didn't charge — plus interest and possible penalties. Typical evidence includes:

• Empty-property work: a letter from the local authority's empty homes officer, council tax records, electoral roll evidence or utility records confirming the two-year vacancy.
• Conversions: planning permission and building control documents showing the change in the number or type of dwellings, plus drawings.
• New builds: planning consent for a new dwelling and evidence it's a genuine new build rather than an extension or rebuild.
• Disabled adaptations: a properly completed eligibility declaration from the customer confirming the disabled person's status and the nature of the work.

Build the evidence-gathering into your quoting process. Ask for the documents before you commit to the rate, file a copy with the job, and reference it on the invoice. A five-minute habit here protects you from a four- or five-figure VAT bill later.

The DIY Housebuilder Scheme — Useful When Quoting Self-Builders

You'll occasionally work for a private individual building their own home or doing a qualifying conversion. Even though they're not VAT-registered, the DIY Housebuilder Scheme lets them reclaim the VAT they've been charged on a self-build or a qualifying conversion — so they recover it from HMRC directly rather than through a business return.

What this means for you on the job: you still charge the correct VAT rate for the work you do (0% on new-build labour, 5% on a qualifying conversion, 20% where neither applies). The self-builder then reclaims the eligible VAT under the scheme. Knowing this lets you quote confidently and reassure a nervous self-builder that the VAT on standard-rated elements isn't simply lost — but be clear you charge the rate the law requires, not whatever rate is most convenient for their claim.

Materials vs Labour — What the Lower Rate Actually Covers

A common misunderstanding is that the reduced or zero rate covers every cost on a job. It generally applies to your qualifying services and to the materials you supply as part of those services. It does not extend to materials the customer buys separately.

• Materials you supply with your work: follow the rate of the service — so building materials fitted on a zero-rated new build are zero-rated, and those on a 5% conversion are reduced-rated.
• Materials the customer buys directly: bought from a merchant by the customer, these are standard-rated at 20% regardless of your job's rate.
• Excluded items: certain things never qualify even on a new build — "white goods" (cookers, fridges, washing machines), carpets and some fitted furniture are commonly excluded and stay at 20%.

The practical takeaway: where you can, supply-and-fit the qualifying materials yourself so the lower rate carries across, and split out any excluded or customer-supplied items as standard-rated lines on your quote.

Getting It Wrong — Both Directions Cost You

This is why eligibility has to be confirmed before you quote, not after:

• Charging 20% when 5% applies: you quote higher than you needed to. The customer overpays, your quote loses to a competitor who priced it correctly, and you've created an unnecessary correction job.
• Charging 5% without evidence: far more dangerous. If HMRC disallows the rate, the difference between what you charged and the 20% due comes out of your pocket — you owe HMRC the shortfall whether or not you can recover it from the customer.

Confirm the rate and gather the evidence before the quote goes out. It's the single cheapest piece of risk management in VAT-rated construction work.

Quick Reference: Construction VAT Rates UK 2026

Before You Quote — Your VAT Rate Checklist

• Is this a genuinely new dwelling (0%), or an extension/annexe (20%)?
• Has the property been empty for 2 years or more (possible 5%)?
• Does the job change the number or type of dwellings (possible 5%)?
• Are you installing energy-saving materials — and what's the current rate?
• Do you hold, or can you obtain, the evidence HMRC will want?
• Which materials are supply-and-fit by you (follow the rate) vs bought by the customer (20%)?
• Have you flagged excluded items — white goods, carpets, some fitted furniture — as 20%?
• Have you run it past your accountant before the quote goes out?

A Quick Disclaimer

This article is general information for UK trades and is not tax advice. VAT on construction is complex and fact-specific — the relief that applies depends on the exact circumstances of each job. The authoritative source is HMRC VAT Notice 708 (Buildings and construction), and you should confirm the correct rate and the evidence required with a qualified accountant before you quote or invoice.