Is your building project zero or standard rated


Rebuilding a residential property and naturally want to keep the costs down.  If you’re a private customer, VAT is a significant factor in the costings so can you zero rate the supply?

Different Rates

When you make supplies to a private customer, or a business that is wholly or partly exempt (e.g. a charity), VAT is a significant part of the cost.  Even for businesses that can reclaim the VAT charged it can make a significant dent in the cashflow and borrowing requirements, especially if it’s a large project.  It’s therefore to your advantage to zero rate your supplies if you can.

Build or rebuild

An example of where VAT is a significant factor is when a building has or will be demolished and a new one constructed.

Trap – subject to conditions, constructing a new residential building is a zero rated supply but rebuilding one is standard rated.  You shouldn’t apply the standard rate as the easy option you must zero rate as the easy option; you must zero rate whenever the rules say so.

What the law says

HMRC in it’s usual way tends to be economic with its general guidance on zero rating.  It says that a new building only applies to a rebuild where “any existing buildings on the site have been demolished completely to ground level”.  However, the legislation explains that a building counts as demolished where “the part remaining above ground level consists of no more than a facade or where a corner site, a double facade, the retention of which is a condition or requirement of statutory planning consent”.

Tip – when considering the VAT rate to apply, check the planning permission for the work.  If it only requires one or two facades to be retained then it is probably that zero rating can apply.

Tribunal Case

Just to reinforce the point about HMRC’s somewhat narrow approach to zero-rating, the First Tier Tribunal (FTT) made an interesting ruling in May 2016.  J3 Building Solutions Ltd had virtually demolished an existing residential property but kept two walls, which wasn’t a requirement of the planning consent.  Naturally, HMRC decided that the building that took its place was a “reconstruction” (rebuild) which didn’t meet the zero rating conditions.  However, the FTT decided that the building wasn’t a reconstruction at all, but actually a completely new building and therefore zero rating applied.

Revisiting the past

This was the second similar ruling in three years, which throws into doubt over HMRC’s ability to objectively consider how the law applies based on the facts.  It’s approach is often to see the position as it wants rather than starting with an open mind.

Tip – you can ask HMRC for an opinion in advance regarding whether a build should be zero or standard rated.  Where you think zero rating applies, emphasise to HMRC the facts that point to this.  If you can persuade it on zero rating, it might giv you the edge when quoting for work.

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