SC 2742 Scrutton Bland-Construction-12pp-FINAL

VAT on Residential Developments The different rates of VAT which can apply to different types of construction work or to the supply of building materials can make it difficult for construction companies to determine the right VAT rate to apply when invoicing clients.

A VAT case last year (St George’s Augustinian Care v HMRC FTT 19 July 2016) underlined the difficulty that businesses within the construction industry face. A construction company is in most circumstances required to charge a 0% VAT rate on work involved in constructing new dwellings (including any materials supplied which are installed within the new building). However, the First Tier Tribunal in the St George’s case determined that a construction of a separate building to provide communal leisure facilities for residents of a retirement village did not form part of a dwelling and therefore the work should have been charged at a 20% rate rather than a 0% rate. The court determined that just because the residents had the right to use these facilities did not mean that the facilities formed part of any dwelling. This approach contrasts with the position adopted by HMRC in VAT Notice 708 which states that a VAT 0% rate could apply to the construction of a block of flats in its entirety notwithstanding that the communal areas of the block may include a “gym, pool and leisure facilities”. With the primary liability for any wrongly invoiced VAT falling on the company responsible for the works, this makes it particularly important for construction companies to carefully consider the VAT treatment when embarking on projects. Thankfully, there are a number of circumstances in which building works should be either charged out at a 5% VAT rate or even at 0% VAT rate (no VAT).

However, due to the complexity of VAT legislation, a contractor may mistakenly apply a 20% VAT rate to such works, or the contractor may choose to charge VAT at 20% to protect themselves from a potential assessment by HMRC if they are unsure about which rate should be applied. Construction of a new build Any works incurred in relation to the construction of a new residential property should be charged at a 0% VAT rate. In other words, a builder will still need to provide a VAT invoice but no VAT is charged on the works carried out. Works carried out by any sub- contractors such as electricians or plumbers in relation to such construction and any building materials supplied in the course of the construction which are incorporated by the contractor into the fabric of the building should also be charged at a 0% VAT rate. If the works involve the demolition of an existing property prior to the construction of a new house, it is important that any such existing building is demolished in its entirety before such works are commenced. Otherwise, the works could be seen as a conversion of an existing building.

Converting a residential property In these circumstances a 5% VAT rate should be applied to construction services which are supplied in relation to:- • the conversion of a non-residential building such as an office, farm building or warehouse into flats or houses; • the conversion of a house where additional dwellings are created; • works carried out to residential property which has been empty for more than two years Refurbishment of residential properties A 20% VAT rate should apply to any refurbishment to an existing residential property where the use remains the same after the works. For example, where there is one house before the works and one house after the works (except if the house has been empty for 2 years), a 20% VAT rate should be charged. The rules around residential property projects are complex, and there are number of conditions which need to be satisfied in order for a lower VAT rate to be applied. However, it is important that both the contractor and the client are clear at the outset of any project on the correct rate of VAT which should be applied. If you have any queries on this issues raised by this article please call any member of our Property and Construction Tax Team (Jason Fayers, Gavin Birchall or Sarah Gamblin) on 01473 267000 or 01206 838400.

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