Construction Services and Zero Rating
06.02.2018
In December, HMRC issued VAT Information Sheet 07/17 to explain their policy on how VAT is applied to the construction of dwellings and other residential buildings which make use of parts of pre-existing or neighbouring buildings.
It is generally understood by developers and contractors that the construction of new dwellings is zero rated. Issues can arise where dwellings are constructed on the site of previous buildings where some elements of the old are retained.
The rules allow that where a façade is retained because of statutory planning consent (or 2 facades forming a corner), this is still construction of a new building and can still qualify for zero rating. However HMRC will not accept that rear walls are a façade unless there is evidence that the local planning authority regard it as possessing some merit and its retention is required for that purpose. Explicit proof will be needed that the façade is retained as a requirement of planning consent.
Recent cases have gone the way of HMRC where elements of previous buildings have been retained. In one case this was only the lower part of a projecting bay but because the retention of the bay was not a condition of planning consent, the work did not amount to construction of a new building but was rather the alteration of the original house.
However in the case of Astral construction, an existing chapel was retained to form a small part of a much bigger nursing home development. The Upper Tribunal found that considering the size, shape, function and character of the new building, it could not be said to be an alteration, enlargement or extension to the church and accordingly zero rating was allowed.
Where developers or contractors are involved in sites which incorporate elements of previous buildings or use neighbouring buildings, care needs to be taken to establish the correct VAT treatment.
If you would like to discuss this issue further, please get in touch with your usual contact at Centurion or Julie Rawlinson-Smith on 07805 134091 or julie.rawlinsonsmith@centurionvat.com