The recent case of Williams v Revenue and Customs is a good reminder that VAT zero rating of new buildings is not unconditional.

The owner was granted planning permission for an extension to his property. The contractor started on site. During construction, the Building Inspector advised the owner not to build the extension due to structural issues in the original building. It was decided that the whole of the original dwelling would be demolished. The contractor commenced construction of a new dwelling, but at that time the planning permission in place only permitted extension of the original dwelling. The contractor continued the building work whilst the owner applied for planning permission for the new dwelling, to apply retrospectively.

The contractor charged VAT of £44,000 on its invoices. Clarification was sought from HMRC on the correct VAT treatment of these building works, namely should it be zero rated?

HMRC issued a decision that the works were subject to VAT at the rate of 20%. A statutory review of the decision confirmed HMRC’s decision and so the owner appealed to the First-tier Tribunal (Tax Chamber).

 Item 2 to Group 5 of Schedule 8 to the Value Added Tax Act 1994 (VATA 1994) provides zero rating of:

“The supply in the course of the construction of –

(a)a building designed as a dwelling…..

of any services related to the construction….”

Under Note (2) (d) to Group 5 for a building to qualify as being “designed as a dwelling”:

“(d) statutory planning consent has been granted in respect of that dwelling and its construction… has been carried out in accordance with that consent.”

The owner argued that planning consent that was granted retrospectively takes effect from its commencement; construction had been carried out since the commencement therefore the VAT rate should be zero. HMRC submitted that the statutory language in Note (2) (d) to Group 5 of Schedule 8 to VATA is in the past tense and speaks of planning consent being ‘granted’. The zero rating could not therefore apply prior to the date of grant of the planning permission for the replacement dwelling.

The state of affairs as at the date of supply is determinative for the purposes of VAT liability and not the state of affairs at the date of completion of the construction nor at any other time, such as the date of the claim for the refund of any VAT. Even though planning permission was granted retrospectively this did not change the VAT position. Those supplies following the grant of planning permission for the replacement dwelling were properly zero-rated; supplies prior to the grant were rated at 20%.

The tribunal acknowledged that this result may seem hard on the owner; it seems harsh to us, but it is a salient reminder for developers.

A link to the full judgement of Williams v HMRC [2017] UKFTT 846 (TC) (21 December 2016) (Judge Rupert Jones) case is available