On 2 December 2017, HMRC published VAT Information Sheet 07/17 which explains HMRC policy on the application of VAT to the construction of buildings where part of the existing building is retained. This follows on from three recent Upper Tribunal decisions8 .
If an existing building on a development site is not fully “demolished to ground level”, then care needs to be taken to ensure that construction of a new residential or other qualifying building can qualify for VAT zero-rating treatment. Broadly, the law requires that, in order to obtain zero-rating treatment, any retained façade is a “condition or requirement of statutory planning consent or similar permission”.
In the VAT Information Sheet:
• HMRC define a façade as the exterior wall of a building most likely to be seen by passers-by. This, however, does not include all exterior walls; the wall has to be designed to a higher standard than other exterior walls thereby having some aesthetic merit.
• HMRC no longer require retention of a façade to be an explicit condition in the planning permission. Instead, HMRC accept that zero-rating can be available (without an explicit condition) provided there is documentary evidence that retention of the façade was clearly envisaged in plans that have been seen and endorsed by the local planning authority (LPA).
• Although “demolished to ground level” requires that no part of the original building remains standing above ground level, HMRC will accept (following the decision in Boxmoor) that a “de minimis” part of the building may remain standing (and not, of itself, prevent zerorating treatment).
The HMRC Information Sheet can be viewed here.