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VAT in construction: 4%, 10% and 22% rates, reverse charge and sales

VAT rates on building works and sales of buildings, significant goods, Article 17 reverse charge and the VAT option: practical cases and mistakes to avoid.

In the construction sector, the VAT rate depends on three elements: the type of works under the Testo unico dell’edilizia (Consolidated Building Act), the use of the building and who the customer is. The reverse charge applies only to certain relationships between businesses and other VAT-registered persons, never to private individuals. Sales of buildings are, as a rule, exempt: VAT applies when the business that built or renovated the building sells it within five years of completion of the works, or when the seller opts for it in the deed, in the cases where the law allows.

The framework

Reduced rates are set out in Table A of Presidential Decree (d.P.R.) no. 633 of 26 October 1972. The 4% rate applies to the sale of dwellings other than those in cadastral categories A/1, A/8 and A/9 (luxury categories) to buyers meeting the “prima casa” (first home) requirements (Part II, no. 21); to finished goods, excluding raw materials and semi-finished products, supplied for the construction, including by direct labour, of “Tupini” buildings (buildings mainly for residential use, as defined by the so-called Tupini Law) and of rural residential buildings, whoever the customer may be (Part II, no. 24); and to contracts for the construction of “Tupini” buildings performed for persons meeting the “prima casa” requirements or for businesses and cooperatives building for sale (Part II, no. 39). The 10% rate applies, in the other cases, to contracts for the construction of non-luxury dwellings and to contracts for restoration, conservative rehabilitation and renovation works on any building (Part III, no. 127-quaterdecies), to finished goods supplied for these rehabilitation works (no. 127-terdecies), and to the sale of non-luxury dwellings to buyers not meeting the “prima casa” requirements (no. 127-undecies). For ordinary and extraordinary maintenance of buildings used mainly as private dwellings, the 10% rate derives from Article 7, paragraph 1, letter b), of Law no. 488 of 23 December 1999, now a permanent rule: the beni significativi (significant goods) listed in the Ministerial Decree (d.m.) of 29 December 1999 benefit from the reduced rate only up to the value of the service net of those goods. In all other cases, the 22% rate applies.

The reverse charge is provided for by Article 17, paragraph 6, of d.P.R. 633/1972: letter a) for services other than those under letter a-ter), supplied in the construction sector by the subcontractor to the construction or renovation business, to the main contractor or to another subcontractor, except where the customer is the contraente generale (general contractor); letter a-ter) for cleaning, demolition, installation of building systems and completion of buildings, to any VAT-registered customer; letter a-bis) for sales of buildings where the option for taxation is expressly stated in the deed. The scope of letter a) follows the ATECO codes (Italian classification of economic activities) in Section F (circular 37/E of 29 December 2006 of the Agenzia delle entrate, the Italian Revenue Agency); that of letter a-ter) follows the codes indicated in circulars 14/E/2015 and 37/E/2015. The regime for sales is in Article 10, paragraph 1, nos. 8-bis) (dwellings) and 8-ter) (business-use buildings).

From 1 January 2027 these rules move into the testo unico IVA (consolidated VAT code, Legislative Decree no. 10 of 19 January 2026). The exemptions under nos. 8-bis) and 8-ter) become Article 37, paragraph 1, letters i) and l); the reverse charge under letters a), a-bis) and a-ter) becomes Article 64, paragraph 6, letters a), b) and c). The reduced rates are found in Table A annexed to the consolidated code (Article 34, paragraph 2), where the 10% rate moves to Part IV. Penalties move to the testo unico delle sanzioni tributarie (consolidated code of tax penalties, Legislative Decree no. 173 of 5 November 2024), whose provisions apply from 1 January 2027.

What changes in concrete terms

A family replacing its boiler. Extraordinary maintenance on a dwelling: total consideration 10,000 euro, of which 6,000 euro for the boiler. The portion not relating to the significant good is worth 4,000 euro: the 10% rate applies to those 4,000 euro and to 4,000 euro of the boiler; the remaining 2,000 euro are taxed at 22%. VAT: 400 + 400 + 440 = 1,240 euro, compared with the 1,000 euro that would result from applying 10% to the whole amount. The invoice must state the significant good and its value, which may not be lower than the purchase price (Article 1, paragraph 19, of Law no. 205 of 27 December 2017).

A construction business that subcontracts. The business builds an industrial building for a client and entrusts the electrical system to an installer for 20,000 euro. The installer invoices without VAT, with nature code N6.7 (letter a-ter); the business supplements the invoice with 22% VAT (4,400 euro) and records it in both the sales and the purchases registers, within the month of receipt or within fifteen days with reference to that month.

A construction company selling a new flat. Sale to a private individual meeting the “prima casa” requirements, three years after completion of the works, for 250,000 euro: VAT is mandatory at 4% (10,000 euro) and charged on the invoice, with registration, mortgage and cadastral taxes at the fixed amount. There is no reverse charge here: it applies only to sales taxable by option to a VAT-registered buyer.

In practice

• Before issuing the quotation, the supplier classifies the works on the basis of the building permit and states the classification in the contract.
• A private customer requesting the 10% or 4% rate issues a declaration on the residential use or on the “prima casa” requirements; the supplier keeps it with the contract.
• In contracts covering several services, the parties keep those subject to the reverse charge separate from those with VAT charged on the invoice, except for a single contract for the construction or renovation of the entire building, to which letter a-ter) does not apply (circular 14/E/2015); if, however, the contract is a subcontract, the reverse charge under letter a) still applies.
• Where VAT depends on the option, the seller of buildings states it in the deed of sale (and already in the preliminary contract, if it collects advance payments): without an express clause in the rogito (notarial deed of sale) the sale remains exempt. The option is not needed where VAT is mandatory, namely for a sale by the business that built or renovated the building within five years of completion of the works and, according to the Agenzia, for an unfinished building sold by a business.
• Documents to keep in case of an audit: building permit, contract, customer declarations, cadastral record, invoices stating the significant goods.

Mistakes to avoid

• Applying the reverse charge to a supply with installation where the installation is ancillary to the supply. This is a supply of goods: VAT is charged on the invoice by the supplier, at the rate applicable to the transaction, without reverse charge (resolution 148/E of 28 June 2007).
• Applying it to a private individual or to a condominio (the owners of a building in co-ownership).
• Calculating the significant-goods limit on the purchase cost when the agreed value is higher, or failing to state the significant goods on the invoice.
• Treating as exempt the sale of an unfinished building by a business: according to the Agenzia it falls outside nos. 8-bis) and 8-ter) and is subject to VAT, without reverse charge (circular 22/E of 28 June 2013).
• Underestimating the cost of applying the wrong VAT treatment: failure to self-account costs from 500 to 10,000 euro, which rises to 5% of the taxable amount, with a minimum of 1,000 euro, if the transaction does not appear in the accounts; the penalty on the tax that the customer could not have deducted still applies. VAT paid by the wrong party costs from 250 to 10,000 euro, with joint liability of the counterparty (Article 6, paragraphs 9-bis, 9-bis.1 and 9-bis.2, of Legislative Decree 471/1997).

References

d.P.R. no. 633 of 26 October 1972, Articles 10, paragraph 1, nos. 8-bis) and 8-ter), and 17, paragraphs 5 and 6, letters a), a-bis) and a-ter)

Table A, Part II, nos. 21, 24 and 39, and Part III, nos. 127-undecies, 127-terdecies and 127-quaterdecies

Article 7, paragraph 1, letter b), of Law no. 488 of 23 December 1999

d.m. of 29 December 1999

Article 1, paragraph 19, of Law no. 205 of 27 December 2017

Article 6, paragraphs 6, 9-bis, 9-bis.1 and 9-bis.2, of Legislative Decree no. 471 of 18 December 1997

Legislative Decree no. 10 of 19 January 2026, Articles 34, 37 and 64 and Table A (applicable from 1 January 2027)

Legislative Decree no. 173 of 5 November 2024 (provisions applicable from 1 January 2027)

Article 1, paragraph 58, of Law no. 190 of 23 December 2014

Agenzia delle entrate circulars 37/E of 29 December 2006, 22/E of 28 June 2013, 14/E of 27 March 2015 and 37/E of 22 December 2015

resolution 148/E of 28 June 2007