You might know there is no VAT due on building a new house, but have you ever stopped to ask exactly what is a new house? This is one of those hair-splitting debates that has bounced around the VAT tribunal for years but has finally been clarified by HMRC’s Information Sheet 07/17 – ‘construction services and zero-rated relief’ – click here. The guidance is built around three precedent upper tribunal cases, only one of which was successful back in 2015 being Astral Construction Limited (2015 UKUT0021). As with anything else VAT related, the zero-rated relief can only be applied where the project squarely fits within the wording of the legislation.
What is now clear from the two cases that lost their argument is that zero-rating can only apply to the construction of a new dwelling where the site has been completely cleared. Retaining any parts of the previous building above ground level will generally block VAT relief. This doesn’t just cover situations where whole walls are retained; as a rule if anything is retained above ground level then zero-rating will not apply to the construction.
The only exception to the ground level rule is if planners require the retention of a façade or two joint façades on a corner site. If there was a planning requirement to retain a façade then it is important that this is carefully documented, ideally in the consent itself. Without evidence of the planners’ requirement that a façade has to be retained HMRC are very likely to reverse any zero-rating applied the construction costs.
The Astral project was unusual in that an entire church was retained in the centre of a much larger new nursing home. Generally any construction that incorporates part of a previous building will not be zero-rated. Occasional extreme cases like Astral might break this mould and qualify for zero-rating but HMRC’s stance will generally be to see VAT as due where construction didn’t start at ground level.