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Markel Tax

11 Aug 2020

Managing VAT risks: civil engineering works

The recent government slogan “build, build, build” and the programme announced by Boris Johnson aimed at driving Britain forward and rebuilding the economy from the impact of COVID-19 will lead to many new projects, and with that there will be associated VAT consequences and opportunities.

In addition to house building, green measures and energy efficiency in buildings, the government projects are likely to involve investment in the country’s infrastructure, which includes roads, schools, hospitals as well as high streets across the UK. In this article we focus on these types of larger projects, including civil engineering works, and the potential VAT ramifications.


While there are various construction projects such as schools or hospitals each with their own VAT issues to consider and manage, there will also be infrastructure projects involving civil engineering works where it is often unclear how the VAT rules should be applied.

When undertaking infrastructure projects, developers will be considering the usual issues such as the applicable rate of VAT on supplies of the works and the recovery of VAT incurred on costs.  Issues such as options to tax, partial exemption calculations and the application of the capital goods scheme (CGS) will arise, particularly as civil engineering and infrastructure projects regularly exceed the £250,000 threshold for the CGS. There are also additional complexities that developers might encounter, for instance in respect of planning gain agreements and section 106 agreements.

This article highlights some of the VAT issues around civil engineering works.

Civil engineering works

When considering VAT in relation to supplies of property, this will include any civil engineering works built on or under the land. The legislation often refers to the term civil engineering works although there is no specific definition of the term. HMRC give examples such as roads, bridges, airfields, oil refineries and pipes used for mains services.

The separate supply of civil engineering works will often be dealt with as commercial property. Both commercial property and civil engineering works share the same definition of “new” in the VAT legislation (Note 4, Group 1, Schedule 9, VAT Act 1994), when supplies of an interest in the property are standard rated whether or not an option to tax is exercised.

However, civil engineering works are more often supplied as part of a larger project.

Civil engineering works: ancillary to a wider supply?

Where civil engineering works arise in the course of construction it will be necessary to determine whether the civil engineering works (e.g. utilities pipes etc.) are part of a single project such as the erection of a new dwelling, in which case the civil engineering works may also be zero-rated as the civil engineering is “ancillary”.

The same principles should be explored even if the project is more widespread, such as the development and sale of an entire housing estate where roads, utilities and other civil engineering are constructed but do not necessarily belong to any specific building on the estate. An estate might comprise of dwellings, shops, schools, etc. and the supply of the different buildings and units in an estate can lead to different rates of VAT or even no supply at all.

This will ultimately be important in determining the developer’s ability to recover input tax, but the review work at this stage will be complex and require attention to the way the civil engineering works are incorporated into the overall project. Parts of the civil engineering works might be sold within other individual supplies (whether standard-rated, zero-rated or even exempt if a dwelling is rented for example), some parts might be given away in exchange for other non-monetary consideration, and some parts might not be sold at all.

The cost of constructing the infrastructure is often apportioned between a number of different uses and supplies made by the developer, and the exact approach will depend upon the detailed nature of the project. 

Planning gain and section 106 agreements

Developers will often enter into an agreement with the local authority as a condition of planning permission being granted. This type of agreement, known as a planning gain agreement or a section 106 agreement (under section 106 of the Town and Country Planning Act 1990), could stipulate that the developer carries out certain civil engineering works such as road construction, drainage and mains, or even hard landscaping e.g. the building of a playground, all at the developer’s expense.

The issue for the developer is whether there is a requirement to charge output tax to a customer in relation to this supply, or whether it is a supply at all. This determination will be required before the developer can decide the appropriate approach to recovering VAT paid on attributable expenses.

Adoption by a public authority

If a developer constructs amenities which will not be sold to any parties, the question arises whether the VAT on attributable costs can be recovered.
Care should be exercised as it is often the case that the amenities are looked after by other parties. This might conceal a supply by the developer or in many cases might mean that no supply has arisen but the VAT on attributable costs can be recovered under appropriate apportionment rules.

Grant funding

Developers frequently benefit from grant funding. The VAT rules require income to be taxed if it is consideration for a supply. The developer should determine whether the grant funding received by the developer, sometimes indirectly, constitute payment for any part of the activities which the grant funding enables it to undertake. 

The approach to this issue is usually to consider whether there are any ties between the funds granted and the activity undertaken, but HMRC has in the past considered even slender ties to be sufficient to pursue a VAT liability in relation to grant funding received. 

VAT recovery

Due to the significant value of many civil engineering projects, and the low threshold for the capital goods scheme (CGS), the works will nearly always fall under the additional rules for capital items.

The CGS recognises the longer working life that a capital item has, and links VAT recovery to how these long-life assets will be used over a period of time (Regulations 114-116, Value Added Tax Regulations 1995). Under the CGS a business must monitor its taxable (or non-taxable) use of property over a ten-year period, including land, buildings and civil engineering works.

Where there is increased exempt use during the course of the CGS (e.g. enforced residential letting due to adverse market conditions), a restriction of the input tax initially recovered would result in repayment to HMRC.

Domestic reverse charge (DRC)

We have focussed on developers in this article, but contractors and sub-contractors should consider the rate of VAT applicable to their supplies too. Mention must also be made of the introduction of the domestic reverse charge for construction services currently due to take effect from 1 March 2021. Relevant to contractors and sub-contractors rather than developers, VAT will not be visible on invoices received by contractors from their sub-contractors, but must still be accounted for under the new reverse charge rules. This will apply to the construction of civil engineering works, with the legislation specifically listing structures such as roads, water mains, pipelines, etc.


Civil engineering works need careful analysis when considering how the VAT rules apply to a project. The ability for a developer to recover VAT on the cost of civil engineering projects will depend on understanding the detailed nature of the project, including how the civil engineering will be used in making supplies and how they will not. 

Taking VAT advice at the planning stage of a project will help to identify hidden VAT costs and issues, manage the VAT risk and ensure that we “build, build, build” on firm foundations.

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Tagged Value added tax (VAT) services
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