HMRC clarifies policy on VAT zero-rating & new buildings

HMRC has recently issued an Information Sheet (07/17) explaining how VAT applies to projects where a building is being constructed that makes use of or retains parts of a building that previously stood on the site, in particular where the building being constructed is designed as a dwelling (or number of dwellings) or is intended for use solely for a relevant residential or relevant charitable purpose.

The policy outlined in the Information Sheet impacts on the VAT liability of the supply of the services of constructing the building and the first grant of a major interest of the property constructed.

Previously, HMRC policy has been that any existing building must have been demolished completely to ground level in order for the construction of its replacement to be treated as construction of a building and for any zero-rated relief to apply on the works or the onward supply of the building. There was some relaxation of the law to allow zero-rating where there was a legal requirement to retain part of a building (for example a façade being retained as part of planning consent).

Three VAT cases have led to HMRC reconsidering its position and clarifying this in the Information Sheet.

The Information Sheet outlines the background to three cases: Astral, where a church was redeveloped into a much larger building designed as a nursing home; Boxmoor, where a house was almost completely demolished before a new house was constructed; and J3BS, where a coach house was redeveloped into a dwelling incorporating several exterior walls of the existing building.

HMRC has clarified that in situations similar to Astral where the works are so extensive that they cannot be described as works of alteration then zero-rating may still apply. It should be noted that the important factor here is that after the completed works the size and function of the building were very different from the original.

In cases similar to Boxmoor and J3BS, where parts of walls are retained, HMRC will still normally require that the retention is an explicit condition or requirement of Statutory Planning Consent, or similar, unless the planning documents make clear the work will be carried out in accordance with plans in which the retention of the façade is clearly shown.

It may be worth revisiting the VAT treatment of any buildings where zero-rating was not available as a result of the retention of part of an existing building where the size and use of the building changed significantly or the plans clearly showed the retention of part of the existing building.