HMRC has updated VAT guidance on when building construction may be zero-rated if sites were previously occupied by other premises, following legal challenges to the existing rules
The general rule is that an existing building must be demolished completely to ground level in order for the construction of its replacement to be treated as the construction of a building. Otherwise the works would be seen as the construction of part of a building, HMRC VAT Information Sheet 07/17 states.
Where there is a legal requirement, for example under a statutory planning consent (SPC), to retain a façade of the previously existing building the law allows the work to be zero-rated as the construction of a building.
The effect of this is to deny VAT relief to buildings that are not constructed ‘from scratch’, in cases where any part of the building existing on the site was not demolished and was included in the building being constructed.
Three cases have gone to Upper Tribunal to decide whether or not the works that had taken place constituted works of constructing a building, or whether they amounted to something else, such as the alteration of an existing building.
In the case of Astral the development included the retention of an entire existing building, a church, that was linked to another much larger structure, which was constructed in close proximity to form a nursing home.
The tribunal rejected HMRC’s argument that that the retention of the church meant the construction of the nursing home could not satisfy the demolition test, saying the sheer scale of the new development and the change of purpose meant it qualified as new.
The case of Boxmoor involved a house that had been demolished to ground level apart from the retention of a small portion of the front façade consisting of the lower part of a projecting bay.
In deciding for HMRC, the Upper Tribunal held that the retention of part of the façade was not a condition or requirement of statutory planning consent and therefore did not amount to the construction of a building but was rather the alteration and extension of the original house.
The third case, J3BS, concerned work to a coach house that involved the retention of several exterior walls and involved increasing the height and footprint of the overall building. The Upper Tribunal ruling in this instance limited the boundaries of the earlier Astral decision to exceptional cases only, by finding that alteration is a broad concept which includes most types of conversion.
In light of these three decisions HMRC has issued new guidance on its policy. This states that demolished to ground level means that there must be no part of the former building, such as external and internal walls or any part of its structure, remaining above ground level.
The retention of any part of a building, such as a basement or cellar, below ground level would not prevent the replacement building from meeting the conditions for zero-rating.
Following the decision in Boxmoor HMRC now accepts that a very minor part of a building may be retained above ground level if it’s small enough to be ignored as ‘de minimis’. However, in Boxmoor the retention of brickwork under a ground floor bay window was held not to be de minimis so the building could not be treated as having been completely demolished to ground level.
HMRC’s policy states that not all external walls can be regarded as façades. Usually HMRC would expect to see an explicit condition within the SPC requiring the faced to be retained, but given changes in planning procedures now says this is not necessary where the documents make it clear that the work will be carried out in accordance with the plans in which the retention of the façade(s) is clearly shown.
The plans submitted to the local planning authority (LPA) must have been endorsed with a statement to the effect that ‘the façade(s) has, or have, been retained in accordance with the policy of the LPA’ with evidence that they’ve been seen and approved by the LPA.
While HMRC accepts that in scenarios similar to Astral, the incorporation of an entire building into a development may qualify if the works are so extensive, it considers the position in Boxmoor and J3BS will be far more common. In cases such as these, most, if not all, of the work will fall within the footprint of the previously existing building.
Only where full demolition cannot take place, because of a condition imposed by the LPA requiring the retention of the façade(s), may the works to replace the original building be treated as the zero-rated construction of a building and not merely the alteration or enlargement of the one that preceded it.
VAT Information Sheet 07/17: construction services and zero-rated relief is here.
Upper Tribunal ruling HMRC vs Astral is here.
Upper Tribunal ruling Boxmoor Construction Ltd vs HMRC is here.
Upper Tribunal ruling HMRC vs. J3 Building Solutions Ltd is here.
Report by Pat Sweet