Property and VAT – buildings qualifying for zero-rating

When considering the applicable rate of VAT in constructing, selling or other supplies involving property, a key concept is the nature of the building.

Determining the nature of a building for VAT purposes can be difficult.  Depending on the circumstances, consideration should be given to the design of the building, the use of the building, what has changed before and after the supply, the requirements of any planning permission, and so on.  Each one of these aspects can be complex to determine in themselves.

The optimum outcome of this process is that the supply qualifies for zero-rating: no output tax is charged to the customer and attributable input tax is claimed.  For example, zero-rating can be applied when a qualifying residential building is being constructed.  In order to qualify, the building must satisfy certain conditions, one of which is that the planning permission or similar provision must not prohibit the separate use or disposal of the building (Note (2)(c), Group 5, Schedule 8, VAT Act 1994).

This condition is regularly a bone of contention with HMRC for those involved in the construction of new houses.  Planning authorities insert obligations into the Section 106 agreement as part of the planning permission granted and, depending on the particular expressions used, these obligations might or might not be interpreted as a prohibition on the separate use or disposal of the building.

This was illustrated in the recent case of Edmont Ltd v Revenue and Customs Commissioners ([2015] UKFTT 0527 (TC) published on 4 November 2015).  A constructor had interpreted the planning permission obligations for the new property to mean that there was no prohibition on use or disposal.  They proceeded to zero-rate their construction works of nearly £½ million.

HMRC however,  took the view that the planning permission required the new house, which was to be erected on an equestrian business site in close proximity to the stables, to be used by a specific class of people (such as those working in the equestrian or similar business) and also that the planning permission prevented the house from being disposed of separately from the rest of the equestrian business site.

The First-tier Tribunal examined the terms of the Section 106 agreement closely and decided that the wording of the obligations in the planning permission did not amount to a full prohibition, neither of the separate use nor of the separate disposal of the building.  The tribunal therefore allowed the zero-rating of the construction services.

This decision illustrates an important point.  In determining the applicable rate of VAT of a supply involving property, careful consideration must be given to which conditions are relevant.  These conditions must all be met before a building can qualify for, for example, zero-rating whether for construction, freehold sale, lease over 21 years, DIY housebuilder’s scheme, and so on.  As is so often the case with VAT, it can be less than straightforward to determine whether a condition has been met and the outcome might not be immediately obvious.

For further information and help on VAT and property or construction, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.