Claiming VAT in the construction industry

Explore the reclaim opportunities available within the industry

For many construction businesses VAT accounts for up to 30 - 40% of all cash flowing through the company. So naturally, it is widely considered a significant source of additional revenue.  However, the impact of successful VAT recovery is often significantly undervalued due to the challenging administrative burden tied to the process and the complexity of the industry's global supply chain and ever-changing VAT legislation.

Many organizations settle for a 'good enough' VAT system, not realising that millions of recoverable costs are slipping through the cracks, and the construction industry is no different. What if your business could tap into the significant well of savings that is rightfully yours to reclaim? 

In a competitive market, no business can afford a sub-par VAT yield. So, how can construction businesses manage their multi-national, cross-border tax strategy and ensure that they save what's rightfully theirs, while staying compliant and optimizing resources? It starts with knowing where to look. However, before we can find recoverable costs - a business must first understand where they should and shouldn't be paying VAT in the first place

Identifying opportunities for VAT recovery in construction

Two overarching types of VAT recovery apply to most industries, including construction: Domestic VAT recovery and Foreign VAT recovery. These two types of recovery solutions are determined by where the expense took place; locally or internationally.

What is the VAT treatment on construction?

Various factors come into play when considering the specific VAT treatment on construction projects. This, in turn, ultimately affects the claimability of certain expenses. Moreso, specific regulations in certain countries may include significant VAT relief on construction projects. One example of this is the VAT relief on new builds. 

New build VAT relief

Did you know that in some countries, depending on the building's intended use - your construction project can qualify as a 'new build'? This means a zero rating (0% value-added tax rate applies). Some common examples of eligible projects that classify as a 'new build' include groundwork, construction from scratch, electrical works, and demolition of existing structures and buildings. VAT relief on new builds can drastically decrease the overall construction cost per project, giving companies a significant foothold in the market. 

Once your business is familiar with its specific VAT treatment and obligations, you can rightfully reclaim all eligible expenses. Here’s how to identify some of the most common hidden expenses within the construction industry.

Common high-value expenses that are VAT recoverable in construction

Maximizing your VAT recovery opportunities starts with knowing where to find the industry-specific recoverable costs within your business. Naturally, this differs depending on where your business operates. However, there are general high-value expenses that are eligible for recovery, including;

• Supply and install expenses

• Input VAT

• Dues/Subscriptions to associations

• Supplies and materials for projects

• Personal protective equipment (PPE)

• Professional Services & Consulting

Domestic VAT recovery for construction

Despite a company’s constant incurrence of domestic VAT (value-added tax) on local business travel and a significant variety of other business-related expenses, companies often still fall victim to common pitfalls within the domestic VAT reclaim process. 

Sure, you’re familiar with common expenses that are recoverable through your local VAT returns in countries where you are established or VAT-registered, such as: 

• Travel and entertainment expenses
• Supplier invoices related to domestic spend
• Eligible Accounts Payable (AP) spend

However, this is just the tip of the iceberg, as common errors, misconceptions and missed opportunities cause significant roadblocks on the journey towards maximizing your savings yield.

Input VAT processes

As your business grows, businesses are often required to scale their VAT registration scope. However, effectively administering and maximizing multiple registrations quickly becomes a resource-intensive process and an administrative nightmare as finance teams become plagued with having to review all transactions and their reclaim potential. The result? Thousands of invoices slipping through the cracks, and your savings and time along with it. In addition, due to the country-specific expenses that are eligible for VAT recovery, identifying what you can reclaim becomes a challenge in itself, especially when your claims look different in each jurisdiction. This often leads to overclaiming VAT on non-deductible expenses, raising red flags to authorities and resulting in rejected claims and potential fines and penalties - no thanks. 

If that isn’t complicated enough, there is always the high risk of submitting a local claim which is less than what is actually recoverable. Within the construction industry, there are a large number of expenses that can go unmissed, for example:

• Constructing, altering, repairing, extending, demolition or dismantling buildings or structures (whether permanent or not).
• Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
• Services which form an integral part of, or are part of the preparation or completion of the services, including site clearance, site restoration, landscaping and the provision of roadways and other access works

Without a proper tracking system, there could be VAT that goes unclaimed.  Rest assured that our state of the art VAT reclaim system is specifically designed to deal with their high volumes to ensure accurate, streamlined and guaranteed domestic VAT processes on local business spend.

Foreign VAT recovery for construction

What is Foreign VAT? 

When businesses conduct activities abroad, they will inevitably incur foreign VAT on a large number of expenses. These expenses, however, classify as business expenses and are 100% recoverable. Such expenses include travel, lodging, car rental, and numerous additional costs. However, these costs cannot be reclaimed via domestic returns - but that doesn’t mean they should be left on the table. 

Foreign VAT recovery allows businesses to recover global business expenses without being registered in the country where the costs are incurred. This allows businesses to significantly increase their savings and inject extra revenue into their business. The first step? Identifying the specific foreign reclaim opportunities within your industry. 

Identifying foreign VAT reclaim opportunities within the construction industry

Equipment purchase, rental, and maintenance

Certain equipment expenses are recoverable in the construction industry. For example, construction projects often include purchasing, renting, and maintaining equipment. This includes cranes, pavers, compactors, concrete mixers, and more. These recurring costs are project dependent and form a significant part of the cost to the company. However, the VAT incurred on purchasing, renting, or maintaining this equipment and supplies is potentially eligible for a full recovery. 

Licencing & permit fees

Construction projects heavily rely on acquiring the right licensing and permits. However, these don’t come cheap. Licensing and permit fees for permit applications, building permits, site inspections, and fees based on location and construction type may fall within the reclaim scope. Understanding which costs are recoverable and which are not can significantly impact your budget, contracting fees, and overall bottom line. 

Hosting and attending of meetings & events, conventions, & trade shows

Trade Shows, meetings, events, and conferences play a huge role for businesses to establish a global presence in the industry. However, this also comes paired with significant costs incurred. Fortunately, many of the costs incurred are eligible for VAT recovery. This includes the VAT on event registration, attendance fees, transport costs, and accommodation expenses. 

How to ensure accurate VAT charges on foreign supplier invoices

VAT recovery hinges on correct invoicing instructions. However, due to the varying invoice eligibility criteria and instructions per legislation, it is often one of the most challenging aspects of VAT recovery. When combining this with the resource-intensive process of combing through high-volume transactions and the risk of human error, the odds aren’t stacked in your favor. Although it’s best recommended to rely on the help of VAT experts to guide you through the process, there are a few core guidelines that ensure accurate VAT charges on foreign supplier invoices. 

• Ensure all invoices contain the required company information (name, address, VAT registration number, etc.)
• In some countries, invoices must be made out to the company for VAT to be reclaimed. 
• Ensure that the invoicing and reporting process aligns with the country-specific reporting obligations. 

What are the eligibility criteria for recovering VAT on construction projects?

Although the VAT recovery process depends on country-specific legislation and rules regarding the VAT treatment on construction projects, there is a general understanding of recovering VAT on common expenses. Firstly, businesses must ensure their project falls within the eligibility criteria. After that, the specific VAT rate that will apply depends on the following: 

• The nature of the construction project
• The building’s intended use
• The organizational status of the client

How to recover VAT on construction projects

A few things to keep in mind to aid the recovery process include: 

• Determine whether your project is eligible for VAT recovery. 
• Ensure that you’re charged the correct VAT rates on all invoices.
• Ensure that your contractor or supplier is VAT-registered to reclaim VAT on those supplies. 
• Obtain and retain valid VAT invoices as per country regulations. 
• Keep all relevant invoices together. 
• Ensure that your claim is made within the country-specific deadline. 
• Outsource the recovery process to experts in the field to ensure you recover the maximum amount.

How can VAT IT build up your VAT savings?

At VAT IT, we focus on recovery, so you can focus on growing your business. As businesses in the construction industry are well aware, the strength of a building hinges on its foundation. We help build a solid foundation for consistent and confident VAT reclaims at VAT IT. We service 38 of the top construction companies and understand the importance of identifying all areas for potential VAT recovery. This includes recovering foreign VAT regarding supply & installation, equipment purchase or rentals, transportation & logistics, travel and entertainment, and more.

Effortless VAT recovery for your next construction project

The VAT landscape is intricate and tricky to navigate. Don’t let small errors or missed opportunities keep you from maximising your recovery potential. Identify, claim and recover your VAT incurred and inject cash back into your business.