Building Projects - VAT Note

Building work involves large sums of money, and the rate of VAT applied can make a material difference ... It is often worth spending time building a strong argument in order to demolish the VAT costs to the ground.

This is a complex area of VAT. One approach might be to examine the contracts as to whether they entitle the builder to pass the VAT charge on to the client. A case (CLP Holding Company Ltd v Singh and another [2014] EWCA Civ 1103) has shown that, despite contractual terms to the contrary, if the client had in practice confirmed with the builder that there was no further VAT to be paid, this might be a sufficient defence.

However, the contracts are usually drawn up sufficiently tightly. If we were asked to look at the impact of VAT, we might better spend our energies considering whether the standard rate is correctly applied to the construction of the new block of flats. The legislation states that the construction of a property is standard rated, except in specific circumstances.

For the construction of new dwellings (zero rated), the conditions are set out in VATA 1994 Sch 8 Group 5. For a conversion (reduced rate), the conditions are set out in VATA 1994 Sch 7A Group 6. It will be important to determine whether the constructions work meet the conditions in either case.

If the builder is an experienced and reliable supplier, it might be that they have identified that the existing building was not demolished to ground level. VATA 1994 Sch 8 Group 5 Note 18 (zero rating) states:

‘A building only ceases to be an existing building:

1. when demolished completely to ground level; or
2. the part remaining above ground level consists of no more than a single façade or where a corner site a double façade, the retention of which is required by planning consent or similar permission.’

Note 18 is effectively brought into play by VATA 1994 Sch 8 Group 5 Note 16, which states:

‘For the purpose of this Group, the construction of a building does not include:

1. the conversion, reconstruction or alteration of an existing building; or
2. any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or
3. subject to Note (17) below, the construction of an annexe to an existing building.’

Note 18 seems clear when it is read in isolation: if part of the building will remain above ground, planning permission must meet the requirements of Note 18 before the works can be considered for zero-rating. The constructor might not have thought twice about charging output tax, if the client’s planning permission does not refer to the retained parts.

At this point, we as advisors might be considering whether the construction works should have been charged to VAT at the reduced rate as a conversion from an existing building (according to Note 18) to a building containing a different number of dwellings. However, before exploring this avenue, it is plain that we should first consider a recent case which was lost by HMRC: J3 Building Solutions Ltd v HMRC [2016] UKFTT 0318 (TC).

This case confirms a reasoning alluded to in an earlier Upper Tribunal case (Astral Construction Ltd vHMRC [2015] UKUT 0021 (TCC)). It is now clear that the definition in Note 18 is not engaged unless the construction works are a conversion, reconstruction, alteration, enlargement, extension or annexe.

There are not enough details in the initial question to consider whether the construction works in this instance fall into any of these categories. However, there does seem to be a good chance that

the works required essentially to for example knock down a large house and build a new block of flats could qualify for zero rating.

One final practical comment: if it is thought that the construction should be zero rated or reduced rated, the next step would be to discuss this with the builder in order to persuade them that their works are not correctly subject to VAT at the standard rate. This is likely to be a difficult conversation, as the builder will be taking responsibility for any VAT which is not charged correctly, should HMRC consider that the standard rate is appropriate. Where the argument is less than clear, the builder might consider approaching HMRC to obtain clarity.

This article is intended as advice in general terms only and clients or others with any issues in this may not rely on it in any specific areas. We accept no liability for anyone who may seek to do so without having obtained proper professional advice If you consider that the matters raised here are relevant to your business please contact us to arrange to discuss this.