The key point here is that the zero-rate for the construction of a brand new house, or block of flats, is subject to conditions. We don't have enough space here for a detailed explanation of all the issues (and to be frank, not everyone shares our appetite for the finer details of VAT) but here are some key points that can cause problems for builders and their clients.
As a reminder, zero-rating applies to most services (but not those of Architects, surveyors, consultants and supervisors) in the course of, construction of a qualifying dwelling plus building materials installed by the contractor.
"In the course of" can cause some complications for services provided before construction starts, e.g. the demolition of structures already on site, or the provision of site infrastructure; or services after a building is complete (e.g. snagging) and may or may not be zero-rated depending on the facts.
We should also bear in mind that for VAT purposes "construction" does not include the conversion, reconstruction or alteration of an existing building. Thus if the project includes any part of an existing structure above the "slab" zero-rating may not be available.
This is an issue that causes problems for projects in areas where the planning authority wants to limit local development. To explain this, we need to start with the fact that, unhelpfully, VAT has its own definition of a dwelling. A project will not qualify unless: -
- the dwelling consists of self-contained living accommodation
- there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling
- the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision
- the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision
- statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent
We have highlighted the 3rd and 4th bullet points. Problems occur when the planning authority imposes a condition that a dwelling cannot be disposed of; or occupied; except in conjunction with other land or buildings. E.g. a farmhouse that cannot be occupied unless the occupant is farming adjacent farmland; or a manager's cottage that can only be occupied by an employee of a local business operating from specified premises.
Further, any reference in the planning consent etc. to the dwelling being an annexe to an existing building may mean that its construction would be subject to 20% VAT.
Our advice to builders working for an end client, particularly in areas where local development is known to be restricted by the planners, is that the builder should review the planning permission before zero-rating the construction of a dwelling; or applying the reduced, 5% rate of VAT to, e.g. the conversion of a barn to a dwelling. And your contract should specify that VAT, at the applicable rate, is payable in addition to the VAT exclusive price.
For our rural clients, wanting to engage a builder to build say a new farmhouse, unfortunately, we often find that they come to us for VAT advice AFTER a lengthy battle with the planners, and have little appetite to go back to the planners seeking the removal of an unhelpful (for VAT) occupancy/disposal condition.
As to whether it is possible to agree a condition satisfactory to the planners, and which is helpful for VAT, it is worth mentioning a case called Barkas. Mr Barkas converted two commercial buildings, one into his residence, and the other into a workshop/office. The local planning authority granted planning permission, subject to a condition that the workshop/office should only be used/operated by the occupiers of the dwelling.
(While this was a case, not on whether a builder could zero-rate the work, but on whether Mr Barkas was entitled to submit a DIY claim, the definition of a dwelling is the same for both.)
Mr Barkas successfully argued that there was no prohibition on the separate use or disposal of the dwelling; the prohibition was on the separate use or disposal of the office/workshop.
Note that HMRC accept that an occupancy restriction that does not prevent the building from being used or disposed of separately from another building, is OK. For example a restriction on occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.
We would however advise caution if a restriction limits occupation to a profession that is only carried on at one specific site in the area. Would HMRC have an issue with a condition limiting occupation to the profession of "Airport worker" for a new house in postcode BS48?
A reminder that if the construction is zero-rated, a contractor may still need to charge VAT in relation to the provision of some materials it installs. Broadly, these encompass: -
- Items not 'incorporated' in the building (or its site) -e.g. loose furniture
- The articles are not 'ordinarily' incorporated by builders in that type of building
- finished or prefabricated furniture, other than in kitchens
- most electrical or gas appliances .
- carpets or carpeting material
Note that this area is not free from controversy, and HMRC's stated position often lags behind caselaw and industry practice.
For example, HMRC's main guidance, Notice 708 states HMRC's view that blinds are not building materials. It does not reflect their acceptance, in Revenue and Customs Brief 5 (2021), that manual blinds are building materials. RCB 5 was issued four months after an earlier Brief, RCB 2, where HMRC announced that they disagreed with, and were therefore disregarding, a case at the First Tier Tax Tribunal which held that roller blinds were building materials.
RCB 5 goes on to say that, in HMRC's opinion, motorised blinds are subject to VAT as electrical appliances, and curtains are not fixtures incorporated into a building.
RCB 5 did not address the earlier case of Coopers Fire Ltd, where the First-tier Tribunal decided that fire curtains, i.e. flame-proof roller curtains, used instead of fire doors/ flame-proof materials are installed in sufficient (often, multi-storey) dwellings to be considered "ordinarily installed". As these are fire safety equipment, the exclusion for most electrical appliances does not apply.
HMRC did win a case where blinds were installed in an eco-friendly house with no air conditioning. The external blinds were linked to a computer and were automatically raised and lowered according to the weather. There was some debate as to whether the blinds could be said to meet the ventilation or air-cooling exception for electrical appliances, but the case was decided on the basis that eco-friendly houses were too small a sub-set of dwellings for such blinds to be "ordinarily installed." The tribunal stated that in the fullness of time such blinds might be accepted as a normal installation, but that time had not yet arrived.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.