The supply of constructing a new house, apartment or other dwelling is usually zero-rated. However there are several circumstances in which such a supply is standard rated.
Item 2, Group 5, Schedule 8, VAT Act 1994 applies zero-rating to the supply of certain services in the course of constructing a building designed as a dwelling, and there are a number of requirements to meet before the zero-rating can be applied.
- Are the services qualifying?
- Are the materials qualifying?
- Is the living accommodation self-contained?
- Is there internal access to any other dwelling?
- Are there any prohibitions on the separate sale or use of the building?
- Is the dwelling constructed in accordance with statutory planning consent?
- And so on, including issues such as whether any existing structures have been destroyed (discussed here: http://www.gabelletax.com/blog/2016/05/31/property-and-vat-construction-incorporating-parts-of-an-existing-building/).
In addition to the above, a further issue should now be considered before confirming zero-rating. In the recent case of Fairway Lakes Ltd v Revenue and Customs Commissioners ( UKUT 340 (TCC), decided on 29 July 2016), the Upper Tribunal confirmed that the supply of the construction of a new dwelling should be standard-rated when supplied as part of a composite supply with another service.
The taxpayer had contracted to supply to a private individual customer both the construction services and the service of procuring that the landowners would grant a lease to the customer of the plot of land on which the dwelling was to be constructed. This was enough for HMRC to conclude that the taxpayer had not supplied a service only within the zero-rating, but that the composite supply was wider than the category for zero-rating and therefore VAT should be applied at the standard rate to the entire supply.
This case could be a concern for those who would supply anything additional with the supply of the construction of a new dwelling. Unless the supplies can be considered separate, the addition of anything to the expected zero-rated supply risks the entire supply being construed as wider than the category for zero-rating and therefore subject to VAT at the standard rate. This will be undesirable where, for example, the buyer is a private individual, a charity or other exempt entity which cannot recover the VAT charged to them.
It would have been interesting to see whether the result would have been different if the taxpayer had argued that there were two supplies (construction and procurement of a lease) which were made separately and did not constitute a single supply which, unsurprisingly, the Tribunal found did not qualify for the zero rate.
What is clear is that, where there is more than one supply of differing rates of VAT (whatever the industry), it is advisable to proceed with caution. Suppliers and their advisers should consider whether multiple supplies might be seen as a single, extended supply on which zero, reduced rating or exemption is lost and the standard rate applies to the whole supply. After many cases in the Tribunals and the courts, the argument as to what is a single composite supply and what are two separate supplies remains complex and our recent report can be found here: http://www.gabelletax.com/blog/2015/01/30/mixed-thoughts-on-mixed-supplies-new-vat-case-reviewed/
For further information and help with VAT on property, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.