The Upper Tribunal has recently confirmed a decision to treat a construction project as a zero-rated 'new build', even though the new structure incorporated an existing building. Owners and developers of houses, care homes and other charity or relevant residential buildings could benefit.
The construction of a brand new dwelling, charitable or relevant residential building is normally zero-rated, but the conversion, reconstruction, alteration, extension or enlargement of an existing buildings does not qualify for this relief. VAT on such projects usually represents a sizeable and irrecoverable cost to the customer.
However, developers and their clients need to be aware of a case brought by Astral Construction, in which it was decided that a project could be zero-rated as a new build because the completed building was substantially larger than the existing building which it incorporated.
The Astral Construction case
Astral was contracted to build a new care home on the site of an old church. Other buildings on the site were demolished but the planning consent required the church to be retained.
The residents' bedrooms and staff/support areas of the care home were all housed in three new wings built around the church. Once converted, the church was used as its entrance hall, reception and office area.
Astral took the view that the work was zero-rated as a newly built 'relevant residential' property because of the scale of the works, the vastly increased footprint of the building and the difference in building materials. HMRC refused zero rating on the project. In its opinion, the work was simply an extension or enlargement of the church.
What was the outcome?
In 2013, the First-tier Tribunal (FTT) decided that the finished construction was, for VAT purposes, a new building and allowed all the construction works to be zero-rated. That decision has now been endorsed by the Upper Tribunal (UT).
The judge in the UT said the FTT had been right to apply a legal test from a largely forgotten 1990s High Court decision, and agreed that the additional works were so extensive in comparison with the original building, it would be wrong to describe them as an enlargement of an existing building.
Could this apply to my project?
HMRC has yet to comment on this case, and may yet appeal further, but if it does not mount a successful challenge, substantial VAT savings could be achieved on similar construction projects.
If you are involved in a project to construct a care home, charity building, or new dwellings (eg a large house or conversion to apartments) around or incorporating an existing building, you should consider taking fresh advice on your VAT position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
