Do Builders Charge VAT on Labour?

VAT (Value Added Tax) can be a complicated subject for people without experience in finances. Companies are used to working with VAT invoices and they generally don’t care about the price increase resulting from that tax. That’s because they can reclaim any VAT they’ve spent on business purchases.

But as an individual, that extra 20% can make a huge difference in a larger contract. If you’re about to build a house, for example, you will definitely want to familiarise yourself with VAT regulations when planning your budget. This can help prevent unpleasant surprises. 

Company size

Builders don’t charge VAT on labour if the construction company is small enough. The current threshold is £85,000 annually. This means that if the company doesn’t generate turnover above that level, it doesn’t have to charge any VAT on its services and products.

This can quickly change when it comes to construction companies, though. Smaller contractors don’t stay below that level for long. Once their work picks up and they start getting more expensive projects, the company may quickly find itself required to register for VAT.

That can lead to an uncomfortable situation if your project spans multiple years. It’s possible that your invoices from the company will be VAT-exempt during the first year, while this changes in subsequent years.

Therefore, you should always communicate with the construction company and discuss this issue in detail. Ask them to inform you when they’re about to make a VAT registration so you can anticipate the extra cost.

Type of work

Even if a company is VAT-registered, this doesn’t mean that they need to charge VAT on all their work. Certain services are VAT-exempt, or at the very least, eligible for a reduced VAT rate.

The most notable example in this category is the construction of a new home. If your project is being built from scratch, you’re eligible for a 0% VAT rate. This doesn’t apply to renovations and other similar work affecting existing structures, however.

The only types of alterations to existing homes that are VAT-exempt are modifications intended to accommodate a disability. If you’re installing a wheelchair ramp, for example, that particular part of the project will be taxed at 0%.

But if your project also includes other parts that have nothing to do with disability accommodation, they will have to be taxed separately. You will have to pay the regular VAT rate on those.

Builder