Building work on a new building intended for use solely for a relevant residential purpose, such as a care home or student accommodation, or solely for a relevant charitable purpose, such as non business use by a charity or a village hall, can be zero rated under Group 5 of Schedule 8 to the VAT Act 1994. The customer must give the contractor a certificate before the supply is made, up to 5% non qualifying use is ignored, and a VAT charge can arise if the qualifying use falls within 10 years of completion.
What does the law zero rate?
Item 2 of Group 5 zero rates services supplied in the course of the construction of a building designed as a dwelling or intended for use solely for a relevant residential purpose or a relevant charitable purpose. It expressly excludes the services of an architect, surveyor or anyone acting as a consultant or in a supervisory capacity, so professional fees are standard rated. Item 4 extends the zero rate to building materials incorporated by the contractor supplying those services. Item 1 zero rates the first grant of a major interest, meaning a freehold sale or a long lease, by the person constructing a qualifying building.
In a design and build contract where professional services are only cost components of the contractor’s supply, VAT Notice 708 paragraph 3.4.1 allows the whole supply to be zero rated.
Unlike dwellings, buildings for charitable use get no help from the reduced rate. Notice 708 section 18 says relevant charitable purpose buildings do not qualify for any reduced rate. The reliefs a charity can obtain on other purchases are covered in VAT reliefs for charities.
What is a relevant residential purpose?
Note 4 to Group 5 covers children’s homes; homes providing residential accommodation with personal care for people in need because of old age, disablement, dependence on alcohol or drugs, or mental disorder; hospices; accommodation for students, school pupils or the armed forces; monasteries and nunneries; and institutions that are the sole or main residence of at least 90% of their residents. Hospitals, prisons and hotels are excluded.
The building itself must be the home or institution. Notice 708 paragraph 14.6.3 gives the example of a bedroom block built in the grounds of a registered care home: it cannot be zero rated because it is part of a larger home, not a home in itself. Note 5 offers a way round this where several buildings are constructed at the same time on the same site and are intended to be used together as a unit solely for a relevant residential purpose. Residential accommodation means sleeping accommodation, so a standalone dining hall does not qualify unless built at the same time as the bedrooms it serves.
What is a relevant charitable purpose?
Note 6 defines it as use by a charity otherwise than in the course or furtherance of a business, or as a village hall or similarly in providing social or recreational facilities for a local community. Notice 708 paragraph 14.7.3 lists places of worship, offices administering non business activity, school buildings where no fee is charged and buildings for grant funded research as typically non business. It lists school buildings where fees are charged, offices administering fundraising events with an entrance fee, and premises of membership organisations charging subscriptions as typically business use. For the underlying test, see what counts as business activity for VAT.
A village hall or similar building qualifies only if it is constructed and managed by a charity, operated on a non commercial basis for the benefit of a local community, and used solely to provide social or recreational facilities. HMRC treats this as met where at least 95% of the building is used for social or recreational activities. Sports pavilions and church halls can qualify. Community amateur sports clubs do not hold charitable status, so a hall they build is standard rated.
Suppliers must take reasonable steps to check charitable status. HMRC says a charity can show this with its Charity Commission registration number or its HMRC recognition letter, which carries the code CTY001.
What does “solely” mean in practice?
A building is not used solely for a qualifying purpose if it is also used for other purposes, at the same or at different times. Notice 708 paragraph 17.11 allows up to 5% non qualifying use to be ignored, and any calculation method that gives a fair result can be used to show 95% or more qualifying use, for example by floor area, time or number of users. Paragraph 17.10 says that for these reliefs HMRC looks at the occupational use of the building, not the economic use.
The building must also be new: built from scratch after demolition to ground level, or keeping no more than a facade required by planning. Additions to an existing charitable building are normally standard rated, but an annexe used solely for a relevant charitable purpose can be zero rated if it can function independently and has its own main access. HMRC contrasts an extension, such as a classroom added to a school, with an annexe, such as a day hospice added to a residential hospice.
How do the certificates work?
Note 12 to Group 5 provides that a supply is not treated as relating to a qualifying building unless it is made to a person who intends to use the building for the qualifying purpose and, before the supply is made, that person has given the supplier a certificate in the form specified by HMRC. Notice 708 section 18 contains two certificates with force of law under Note 12: one for zero rated and reduced rated building work, and one for zero rated sales and long leases.
Points that catch people out:
- The certificate must be issued before the supply. HMRC will allow a contractor to adjust for a belated certificate only if the customer can show it intended the qualifying use at the time and all other conditions are met, and subject to the four year cap on corrections.
- A subcontractor working for the main contractor should never be given a certificate and must standard rate its supply.
- Only the person who will use the building can certify building work. An investment company that has a care home built and leases it to an operator cannot certify the construction, but it can certify the purchase of the freehold from a developer because the sale certificate covers use by tenants.
- A certificate does not by itself make the supply zero rated, and the supplier must take reasonable steps to check it. Under Extra Statutory Concession 3.11 a supplier acting in good faith will not normally be assessed if the certificate proves wrong.
- A customer who issues an incorrect certificate may face a penalty equal to the VAT not charged, unless there is a reasonable excuse.
What happens if the use changes within 10 years?
HMRC expects a certificated building to be used solely for qualifying purposes for 10 years after completion. For buildings completed on or after 1 March 2011, a taxable charge arises if, within that period, the owner sells the building (whether or not the qualifying use continues), leases it to someone who will not use it solely for qualifying purposes, or changes or reduces its own qualifying use. The rules sit in Part 2 of Schedule 10 to the VAT Act 1994 and do not apply if the building is demolished to ground level within the 10 years.
The charge is a self supply. Its value is the original zero rated value, adjusted for the proportion of the building affected and for the months remaining in the 120 month period, and VAT is charged at the standard rate in force at the time of the change. The owner declares it as output tax for the period of the change and may deduct it as input tax to the extent the building is used for taxable supplies. If the charge is £250,000 or more and the building is used for exempt supplies, the Capital Goods Scheme may apply. An unregistered charity may become liable to register because of the charge.
How is the charge worked out?
HMRC’s own example in Notice 708 runs as follows. A charity builds a five floor building for £5 million, zero rated on the basis of non business use, with VAT at 20% at the time. After five years it starts to use the top floor for business purposes.
| Step | Figure |
|---|---|
| Original zero rated value | £5,000,000 |
| Proportion affected (1 floor of 5) | 20% |
| Months remaining (60 of 120) | 50% |
| Value of self supply | £500,000 |
| VAT at 20% | £100,000 |
If the charity instead sold its whole interest after five years, HMRC’s second example gives a self supply value of £2.5 million and VAT of £500,000.
What mistakes come up most often?
- Zero rating architects’ and surveyors’ fees on a qualifying project.
- Issuing the certificate after the work has been invoiced, then finding the four year cap blocks a correction.
- Certifying a building for charitable use when the charity will charge fees for its activities there, such as a fee paying school.
- Forgetting that hiring out a charitable building, or selling it within 10 years, can trigger a self supply charge.
Errors found later should be corrected under the normal rules for correcting VAT errors.
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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.