The favourable decision reached by the tribunal in the recent case of Astral Construction Limited (Astral)( UKFTT 374 TC)will provide an opportunity for businesses involved with the construction and development of residential buildings to claim VAT in respect of zero rated building works.
Zero rating has been approved by the tribunal in respect of the development of a nursing home on the site of a redundant church, which was retained as a part of the development and planning process.
The case will be of interest to practitioners advising clients involved with similar developments.
Key aspects of the case
Astral were responsible for constructing a 72 bedded residential nursing home that was integrated into part of an existing disused church. The development retained the church as its centrepiece, a requirement stipulated by the Council at the planning stage. Other buildings were demolished and two new 2-storey wings were built creating three new sides of a square with the church and each of the ends of two of the wings making up a fourth side. The church itself, while retaining its original exterior had been altered internally.
Astral contended its supply of the construction services should be zero rated under VAT Act 1994, Schedule 8, Group 5, Item 2. The scale of the works, the difference in building materials and the increase in footprint all pointed to a new build, not a conversion or enlargement.
HMRC considered the development was a conversion of and/or an extension to an existing building, the church, thus taking the supply out of zero rating and that the works should have been subject to the reduced rate of 5% pursuant to Schedule 7A, Group 6.
HMRC contended the works were the conversion of the church to a relevant residential purpose or an extension to the church. HMRC maintained that the church remained the focal point of the development and gave the appearance of dominance. A situation could never, in HMRC’s submission, be reached where an increase in area could no longer be described as an enlargement because of the wording of the legislation. The legislation refers to “any enlargement of or extension to an existing building”.
HMRC’s alternative argument was that the new build was a conversion of the church. Again it involved a question of degree. The church had been structurally integrated into the care home but forms a proportionately very small area of it.
The tribunal compared the buildings before and after the construction and concluded that it would be a misnomer to describe the works as an extension. Viewed structurally and as a whole the church was dwarfed by the new build. There was no impression of enlargement. The sheer scale of the works precluded this.
The structure was one single fully functioning nursing home. As a matter of impression, size, shape, function and character it was vastly different from the existing church and cannot be said to constitute the conversion, enlargement or extension of the church.
Taking into accounts these facts, the tribunal found that the works were zero rated.
At the time of writing, it is not known whether HMRC will challenge this decision. This is a clear view taken by the tribunal that the enlargement, extension or conversion of a property is, to a large extent, a question of fact and degree. The new structure was so far removed from the ordinary meaning of enlargement, extension or conversion of the existing building that zero rating should apply.
Businesses that have incurred VAT on construction costs relating to the enlargement, extension or conversion of properties should review their position and make claims where appropriate.