Whether VAT should be included in your rebuild cost assessment depends on your property type and your VAT status. For most commercial property owners in Ireland, it needs to be included, at least in part.
But here is the problem: the rules differ depending on whether you are VAT registered, whether you own the property for your own business use or as a landlord, and whether a claim involves total loss or partial damage. Most commercial property owners have never had this explained to them, and many are carrying the wrong sum insured as a result.
Does a Rebuild Cost Assessment Include VAT?
In Ireland, VAT on building construction costs is charged at 13.5%. Professional fees, covering your architect, structural engineer, and chartered quantity surveyor, are charged at 23%.
A professionally prepared rebuild cost assessment will present figures both with and without VAT, so your broker can apply the correct treatment based on your specific tax position. The decision on what to include in your sum insured sits with you, your accountant, and your broker, not the surveyor.
Revenue’s guidance on VAT and property construction in Ireland makes clear that treatment in this area is governed by formal rules and the owner’s specific circumstances, not a single blanket rate applied to all rebuild costs.
How VAT Works on Commercial Property Rebuilds
For residential properties, one rule applies to total loss: if the building is completely destroyed and rebuilt from scratch, construction work attracts zero-rated VAT. The cost to rebuild on a total loss basis does not, in theory, carry VAT on the construction element itself.
But here is what that rule misses. In almost all real-world claims, a property is not completely destroyed. Partial loss is far more common than total loss.
When only part of a structure is damaged and needs to be repaired rather than rebuilt from scratch, VAT is charged on those repairs at the standard 13.5% rate. The zero-rating does not apply. So a residential property owner who excludes VAT from their sum insured on the assumption of a total loss scenario is, in practice, underinsured for the most likely type of claim.
For commercial property owners, there are three distinct VAT positions, each with a different correct answer for the sum insured.
The Three Commercial Scenarios That Determine Your VAT Position
Owner-occupied commercial property, VAT registered
Building works on commercial properties are standard-rated for VAT. If the property is used entirely for taxable business activities, you can reclaim that VAT through your return. Your insurer should therefore settle on a net-of-VAT figure.
Including VAT in your sum insured in this case creates over-insurance, not a safety net.
Commercial property owner, not VAT registered
The full VAT cost falls on you, with no mechanism to reclaim it. Your sum insured must include VAT on both building works and professional fees. Leave it out and you will face a shortfall at the point of claim.
This applies to smaller commercial property owners, certain landlords, and property investment structures that do not generate VATable income.
Landlord without the option to tax
By default, rental income from commercial property is exempt from VAT in Ireland. Without the option to tax in place, you cannot reclaim VAT on rebuild costs or professional fees. VAT must be included in full in your sum insured. Many landlords are caught out here.
The opt-to-tax position is one of those things that sits in the background of a commercial property transaction and never gets revisited at renewal.
Regardless of your VAT recovery position, professional fees always carry VAT at 23% and must be factored into your sum insured.
What the Average Clause Does to a VAT Shortfall
For property owners, VAT and the Average Clause are directly connected.
If your buildings are inadequately insured, your insurer can apply the Average Clause to any claim, proportionally reducing your payout by the same percentage as the underinsurance.
A property owner who excludes VAT from a €1.5 million sum insured could be exposed to a shortfall of €200,000 or more once professional fees, demolition, and repair costs are factored in at the applicable rates. Under the Average Clause, every claim they make, however small, is reduced in proportion.
This is not a technicality. It is the mechanism by which an incorrect VAT position translates into a materially smaller claim settlement at the worst possible moment.
What Your Rebuild Cost Assessment Report Should Include
Your rebuild cost assessment report should give you a clear VAT breakdown across every cost element: construction works, demolition, debris removal, professional fees, and ancillary items such as outbuilding reinstatement or an extension. If the figures are not separated, your broker cannot apply the correct treatment. Neither can you.
Some calculators provide a minimum base cost figure inclusive of VAT at SCSI rates, which is useful for standard residential property.
For commercial property, for period houses, bespoke properties, or any property where the gross internal floor area and construction complexity go beyond what an online calculator can assess, a site-based assessment by a chartered surveyor or chartered quantity surveyor is the only reliable route.
Is Your Commercial Property Insured for the Right Rebuild Cost?
If you are a commercial property owner and your current sum insured was set without a professional rebuild cost assessment, you almost certainly do not know what your correct VAT position is within that figure.
Most commercial properties in Ireland are not insured for the correct rebuild cost. Research from Brokers Ireland puts the figure at 85% of buildings. Rebuild Valuation’s own experience with commercial properties in Ireland suggests it is closer to 90%. Either way, the risks of underinsurance are not marginal.
Before your next renewal, get advice from both a RICS-regulated building surveyor and your accountant. One confirms the rebuild cost. The other confirms whether VAT should be in or out. Your broker then has everything they need to place cover correctly.
If you need a reinstatement cost assessment for a commercial property in Ireland, Trevor Kelly is a RICS-regulated Chartered Building Surveyor with over 20 years of experience in property insurance. Get in touch to discuss your property.