Improvements contracted directly with the builder are subject to 21% VAT

The application of the reduced tax rate in construction works generates frequent doubts at the time of the delivery of new homes. A recent resolution from the General Directorate of Taxes (DGT) clarifies the scenario in which a buyer decides to make modifications or improvements to their future home before the final delivery.

What the DGT has resolved

The inquiry analyzes what type of VAT should be applied when a home buyer contracts directly with the construction company to carry out improvement works. The Administration's criteria establish that these operations must be taxed at the general rate of 21%.

The DGT bases this decision on two main reasons:

• Absence of a contract with the developer: To apply the reduced 10% rate on construction works, it is necessary for a direct contract to exist between the developer and the contractor. Since it is the buyer who agrees on the improvements with the construction company, this link necessary for the benefit of the reduced rate is broken.
• Non-existence of renovation or repair: The 10% rate corresponding to renovation or repair works is also not applicable, given that the construction of the home has not concluded previously. For these works to be considered repairs, the building must have been completed at least two years before the start of the works.

What it means for you

If you are an individual acquiring a home under construction, you must take into account that any modification or improvement you request directly from the construction company will have a higher fiscal cost. As the 21% rate is applied instead of 10%, the final invoice amount for said works will be higher than expected if the reduced rate was intended to be applied.

What is advisable to do

It is necessary to evaluate the structure of the contracts before proceeding with the improvements. Development and construction companies must distinguish precisely whether the improvement contract is formalized with the developer or directly with the end client, as the correct application of the VAT rate depends on this distinction. It is recommended to analyze the financial impact of these works on the total acquisition budget before signing new agreements with the construction company.