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.
Can I recover VAT on my costs?
Residential landlords, health providers, charities and private individuals cannot recover VAT on their costs. However, they can reduce the cost of construction by paying closer attention to certain 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.
I am incorporating parts of an existing building into a new residential building - can I claim zero rating?
Apart from a few very specific exceptions, Her Majesty's Revenue & Customs’ (HMRC's) policy is that construction works cannot be zero-rated if they incorporate part of an existing building. This is useful to know at the planning stage, as some walls or parts of an existing building are often retained, and this causes the works to be standard-rated.
Can I challenge that ruling?
Recent cases show that HMRC’s policy of standard-rating can be resisted under certain circumstances. The Astral Construction case on 1 August 2013 concerned the construction of a new nursing home; the existing building was not razed to the ground before the construction of the new residential-purpose building. Even so, the First-tier Tribunal found that it should be zero-rated and 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. This judgment was confirmed in the Upper Tribunal (2015 UKUT 0021).
Are there any other instances of this happening?
There was a further relaxation of HMRC’s strict requirements on 2 December 2017. One of the occasions permitted by law (Note 18, Group 5, Schedule 8, VAT Act 1994) when zero-rating can apply to the construction of a qualifying new building despite incorporating part of an existing building is when a facade is required to be retained by planning consent. This caused difficulties when the industry practice was for developers to discuss with the planning authorities before submitting plans for consent. Details such as whether a facade was required to be retained were resolved during pre-submission discussions, and the final planning consent reflected the plans submitted, not the requirement implicit in prior discussions. In VAT Information Sheet 07/17, HMRC accepted that this industry practice meant that their policy had been unrealistic in relying solely on planning consent, and they will now accept alternative evidence of the requirement.
Can challenges be retrospective?
These developments 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 recent years, where VAT was charged at the standard rate, and review whether they might be able to recover the VAT incurred.
What about going forward?
Similarly, those planning to construct new residential buildings while retaining parts of an existing building should review whether the works can, in fact, be zero-rated.