Property and VAT – construction incorporating parts of an existing building
Significant savings can be made on the cost of construction works by ensuring the lowest rate of VAT applies.
Paying attention to the VAT aspects of construction costs can help constructors to keep their prices competitive or their profits higher. Similarly, those who commission building work but cannot recover VAT on their costs e.g. residential landlords, health providers, charities, private individuals and so on can reduce the cost of construction by paying closer attention to the VAT aspects. This is also an important issue when it comes to securing funding from lenders, as banks often will not lend against the VAT aspects of the costs.
One example of where significant VAT savings can be made is when an existing building is demolished and a new building is erected. The works in constructing a qualifying new residential building are zero-rated. However, the legislation requires that any existing building is razed to ground level before and HMRC’s policy is that the construction works cannot be zero-rated if it incorporated part of an existing building, with only a few very specific exceptions.
While this is useful to know at the planning stage as, before the VAT aspects are considered, some walls or parts of an existing building are often retained and cause the works to be standard-rated. However, even if parts of an existing building are retained, recent cases show that HMRC’s policy of standard-rating can be resisted under certain circumstances.
We reported on the Astral Construction case on 1 August 2013 (http://www.gabelletax.com/blog/2013/08/01/conversion-of-property-or-new-build-opportunity-for-vat-reclaims/), where the Tribunal found that the construction of a new nursing home should be zero-rated, despite the existing building not being razed to the ground.
This case has now been confirmed and further clarified by the decision in J3 Building Solutions Ltd v Revenue and Customs Commissioners ( UKFTT 0318 (TC), published 18 May 2016). The taxpayer had largely demolished an existing building, retaining a wall that was not required to be retained by planning consent. HMRC did not accept that the works were the zero-rated construction of a new dwelling as there had been an existing building which was not razed to ground level. However, the Tribunal concluded on the facts that the legislation did not operate in the way HMRC thought and found for the taxpayer. The works were zero-rated accordingly.
These cases confirm that it is worth challenging HMRC’s policy that an existing building must be razed to the ground in all cases before zero-rating can be applied.
Firms of constructors and those who have commissioned works but could not recover their input tax should now consider any residential buildings which have been constructed or converted in the past four years, where VAT was charged at the standard-rate, and review whether they might be able to recover the VAT incurred. Similarly, those now planning to construct new residential buildings and retain parts of an existing building should review whether the works can be zero-rated in spite of the legislation and HMRC’s policy.