VAT in the construction sector can be deceptively complex. Whether you’re a contractor, subcontractor, or property developer, misunderstanding how VAT applies to your business could lead to expensive errors — or worse, HMRC penalties.

Here are five of the most common pitfalls we see in the property and construction industries, and what you can do to stay compliant.

1. Incorrect VAT Treatment on New Builds vs Renovations

One of the most common VAT errors we see is the misapplication of the zero-rating for new builds. While most new residential constructions are zero-rated, renovations, conversions, and refurbishments are often not — and may fall under the reduced 5% rate or the standard 20%.

Tip: Always confirm which VAT rate applies to each specific job before quoting or invoicing. If in doubt, consult VAT Notice 708 or speak with a construction-specialist accountant (like us!).

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2. Overlooking Reverse Charge VAT for Subcontractors

Since 2021, the VAT domestic reverse charge has been in effect for most construction services. This means subcontractors do not charge VAT on their invoices for qualifying services — instead, the contractor accounts for it on their VAT return.

The problem? Many subcontractors still include VAT on invoices incorrectly, and many contractors forget to apply the reverse charge accounting treatment.

Tip: Review every invoice through the lens of the Construction Industry Scheme (CIS) and reverse charge rules. We often help clients build a quick reference checklist for staff to use.

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3. Not Registering for VAT at the Right Time

You must register for VAT once your taxable turnover exceeds £90,000 in a 12-month rolling period (as of 2024). Many construction businesses fail to track this properly, especially when working across multiple sites or under different company structures (e.g., SPVs).

Tip: Keep a running monthly total and speak to your accountant regularly to ensure timely registration.

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4. Claiming VAT on Ineligible Purchases

You cannot reclaim VAT on all expenses. Common examples of disallowed claims include:

• Client entertainment
• Company cars (in many cases)
• Some materials used in exempt developments

Tip: Use a cloud-based accounting system with VAT rules built-in, and have your accountant review VAT reclaims quarterly.

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5. Using Outdated VAT Rates in Quotes or Contracts

Contractors sometimes use pricing templates that haven’t been updated for years. With multiple VAT rates (0%, 5%, 20%) and rules that depend on both the type of work and the status of the client, relying on guesswork can be costly.

Tip: Build a rate-check into your quoting process and educate staff on the different rates and when to use them.

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Final Thoughts

VAT doesn’t have to be painful, but it does require consistent attention — especially in an industry as nuanced as construction. At our firm in Cheadle, we specialise in helping property and construction businesses get their VAT right the first time, every time.

Need a second opinion or a VAT health check? Get in touch for a no-obligation conversation — we’re always happy to help.

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