VAT liability of construction services

The First-tier Tribunal recently heard an appeal by a construction company regarding the VAT liability of construction services supplied at a residential property in a North London suburb. The homeowners had sought and been granted planning permission for major works to the property. The planning consent was granted in August 2010 and described the approved works as‘single storey side, single and two storey side to rear extensions incorporating front dormer and roof alterations’.

The works actually carried out involved the removal of the entirety of the previous dwelling with the exception of a small portion of the front facade referred to as the ‘projecting bay’ and the construction, incorporating that facade, of a replacement dwelling. The Tribunal case centred on whether the work undertaken related to the reconstruction of an existing building (standard-rated for VAT) or whether the work was the construction of a new home (zero-rated for VAT).

The contractor, the appellant in this case, took the view that their construction work related to the construction of a new dwelling (home) and that the supply was zero-rated for VAT. Sometime after the work was completed, the contractor was visited by HMRC who took the view that the work on the home related to a re-construction and hence was standard rated for VAT. HMRC issued assessments which were the subject of the appeal.

The Tribunal had to decide whether the work carried out amounted to the demolition of the existing building and the construction of a new building. Here, the Tribunal was clear that the onus of proof fell on the builder to demonstrate that his supply was zero-rated. Whilst all parties accepted that the work on the house was substantially a new build, it was clear that a small part of the existing building was retained mainly to ensure that the planning consent was not nullified. This was enough for the Tribunal to conclude that the ‘while in substance the works might have amounted to the construction of a new dwelling, it was not a construction which fulfilled the conditions for zero-rating’. The taxpayer’s appeal was dismissed.

This was an expensive lesson for the builder in this case and highlights the importance of making sure that a supply such as this meets all the necessary conditions for zero-rating.

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The Tax Man

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