It may have gone unnoticed by some in the construction industry, but HMRC very nearly pulled a fast one over the summer. In a move described by one commentator as "a moment of madness", design and build contracts may suddenly have become a lot more expensive to run.
HMRC have adopted a strategy in recent years of "re-interpreting" tax legislation so as to maximise revenue. One of the areas recently identified as suitable for "reinterpretation" was design and build.
Historically, HMRC has accepted that professional services supplied by a building contractor along with the building works attracted the same VAT liability as the works themselves. So, for example, architects' and surveyors' services provided in connection with new build accommodation would be zero-rated. This is because those professional services, although usually standard-rated, become subsumed in a construction contract so that only the construction element actually exists as a product at the end of the process. Many developers structured their arrangements with their contractors to take advantage of this.
However, in a small paragraph hidden away in a draft revision to Notice 708 circulated over the summer, HMRC sought to change all this. Draft revision paragraph 3.4.1 said "Where the design, workmanship and materials are supplied under a 'design and build' lump sum contract, the VAT liability of the design element will be standard-rated". Followed through to its logical conclusion, this could mean that the sale of new housing would no longer be zero-rated because its provision contains of necessity some element of architectural and surveying cost.
Luckily this draft revision was spotted by eagle-eyed members of the consultation group and quickly became the subject of intense lobbying.
The new version of Notice 708, which was published on 17 November 2011, says, at paragraph 3.4.1, that provided that "it is clear in the contract that any services of architects, surveyors or others acting as consultant or in a supervisory capacity are no more than cost components of the contractor's supply and are not specifically supplied on to the customer, then the whole supply can be treated as eligible for the zero rate".
It looks as though the industry has dodged a bullet; thanks to the keen eyesight and tenacious lobbying of the consultation group.
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