Zero rating for new build dwellings
Building works to construct a new dwelling are VAT zero rated but there are strict conditions to be met for this beneficial zero rate of VAT to apply and the recent case of CMJ (Aberdeen) Limited v H M Revenue & Customs is a stark reminder of the perils of stretching these conditions.
The conditions as set out in VAT law are that:
- The supply is in the course of construction of a building designed as a dwelling; and
- The services relate to the construction.
Simple enough but then the law goes on to define a dwelling as follows:
- The dwelling consists of self-contained living accommodation;
- There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
- The separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and
- Statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.
And a new dwelling is one where:
- The existing building has been demolished completely to ground level; or
- 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 a condition or requirement of statutory planning consent or similar permission.
In the CMJ case the planning consent was for an enlargement to an existing dwelling but during the course of the works it became clear that the existing walls were not strong enough to support the planned building and so a building warrant was issued allowing the existing building to be mostly demolished.
Building warrants are specific to Scotland but the principles around this case apply equally to the rest of the UK insofar as the final condition of the definition of a dwelling refers only to statutory planning consent which the Tax Tribunal found to exclude any other form of consent.
A retrospective new build planning consent was obtained in this case but HMRC won their argument that zero rating could not apply because at the time the construction services were supplied there was no such consent.
The moral of this tale is to fully consider the VAT implications of any building project at the outset and to take the relevant advice. There are acceptable planning measures that can be implemented to mitigate irrecoverable VAT cost on construction projects but, as with all planning, the key is to do it before the project starts rather than once it is underway or worse still completed. Contact us for advice.
