Charlton Baker

Construction services are essentially the services of building contractors and others performed upon buildings or land. In many cases, these will be subject to VAT at the reduced or zero-rate. Depending on the nature of the work, the VAT relief may extend to all subcontractors.

NEW DWELLINGS

Construction services provided in the course of the construction of a new dwelling are eligible for zero-rating.

This zero rating covers both the construction services themselves and the materials provided by the person providing those services in connection with the performance of the services.

In order for the zero-rate to apply, the nature of the project must be new construction work. In most cases, this means from the ground up. However, there are circumstances in which a dwelling will be considered to be new, even though the previous building on the site has not been completely demolished. This will occur where a single façade has been left standing as a condition of planning consent.

The zero rating extends to all contractors involved in the project, such as plumbers, electricians, roofers, etc.

These services may be zero rated by the subcontractor whether they work for the building owner or for a main contractor.

Certain items are excluded from zero rating. These are:
Prefabricated furniture or materials for the manufacture thereof
Electrical or gas appliances, unless they are
Designed to heat space or water or to provide ventilation, air -cooling, air- purification or dust extraction
A burglar alarm, fire alarm or fire safety equipment for summoning emergency aid
A lift or hoist
Carpets and carpeting material
Any item not ordinarily installed by a builder in a dwelling

Where any of these items are supplied by a contractor their value must be separately identified and VAT

Charged on them at the standard rate. The services of installing such goods remain zero-rated.

RELEVANT RESIDENTIAL BUILDINGS

Construction services provided in connection with the construction of a “relevant residential” building are also zero-rated.

In these circumstances the zero rating is limited to the main contractor, namely the person who makes a supply to the owner of the property, where the owner is the person who intends to put the property to a relevant residential purpose. It follows from this that subcontractors may not zero rate their services under

this provision. However if a number of individual contractors work for the owner of the building, each is entitled to zero rate his services.

The zero rating is not valid unless the owner of the building has issued the subcontractor a certificate. The contractor must make reasonable checks to ensure that the certificate has been correctly completed.

For the purpose of these provisions, the building is used for a “relevant residential” purpose, where it is:

A children’s home
A home for the care of those requiring it by reason of old age, disablement, alcohol or drug dependency or mental disorder
A hospice
Residential accommodation for students or school children
Residential accommodation for the armed forces
A monastery, nunnery or similar, or
An institution which is the sole or main residence of at least 90 percent of its residents.

Hospitals, prisons or similar institutions, hotels and inns do not apply here.

RELEVANT CHARITABLE USE

Construction services may also be zero rated on exactly the same basis as immediately above, where thebuilding is to be used for a “relevant charitable purpose”.

DESIGN & BUILD CONTRACTS

The services of architects, surveyors etc are not covered by zero rating and therefore are always chargeableto VAT. However, where such professionals supply their services to a building contractor, who builds their costs into the overall contractual value of his services, zero-rating may apply to the whole.

LISTED BUILDINGS

A number of conditions must be met for zero –rating to apply. In essence, there are four conditions to be fulfilled:

The building is, or is intended to be used as a dwelling of for a relevant residential or relevant charitable purpose
The building work required listed building consent
The building work received listed planning consent
The work consists of an alteration to the fabric of the building

Where the work involves part alterations and part repairs and maintenance, it is necessary for the builder to apportion the value of their work, zero-rating the alterations and charging VAT on the repair and maintenance.

It should be noted that there might now be circumstances where the “vatable” element of work to a listed dwelling may be rateable at 5% as opposed to 17.5% e.g. the conversion of a listed barn into a dwelling.

REDUCED RATE

From 12th May 2001, the 5% VAT rate was extended to apply to various forms of building development.

This was aimed at encouraging the use of existing property in favour of building on Greenfield sites.

The types of development covered were:

The conversion of a non-domestic building into a dwelling or dwellings
The renovation of a dwelling mot occupied as such for three years
Work to a building which changes the number of dwellings within it, and
The conversion of a building to “relevant residential” use or use as a multiple occupancy dwelling (e.g. bedsits)
Converting a non residential property into a care home
Converting a non residential building into a multiple occupancy dwelling
Converting a “relevant residential” building into a multiple occupancy dwelling
Renovating a care home unoccupied for three years or more, and
Creating a garage in connection with a reduced rate project

As a general guideline it can be seen that the reduced rate of VAT is likely to be applied where a building is being converted from one use to another and the resultant use is residential in some way. Finally a project

changing the number of dwellings within a property may qualify in full or in part.

It must be borne in mind that the reduced rate covers construction services, not the subsequent disposal by the owner of the converted property. This wills either be exempt or zero-rated depending on the circumstances.

There are therefore some cases where the reduced rate offers nothing more than a cash-flow advantage to adeveloper and others where it represents an absolute saving equivalent to 12.5% of the net cost. Furthermore, it has the added benefit of bringing VAT of expenditure relating to exempt activities below the de minimis limits for partial exemption purposes.

NON-EXEMPT PROPERTY TRANSACTIONS (FOR OWNERS OF BUILDINGS)

The basic liability of land and buildings transactions is exempt. There are a surprising number of situations in which the exemption does not apply, making the transactions compulsorily standard rated.

NEW COMMERCIAL BUILDINGS

The freehold sale of a new commercial building is standard rated. The building is new until the third anniversary of the date of practical completion, or the date of first full occupation, whichever was earlier.

This applies regardless to the identity of the vendor and whether or not they constructed the property. This can be a trap for a business that has purchased premises for his own use, claimed the VAT incurred on the purchase and outgrown the premises within the three-year period. In these circumstances, the subsequent sale of the premises will be subject to VAT.

Other areas, which may be reviewed upon request, are:

New civil engineering works
Partly completed constructions
Gaming rights and fishing rights
Hotel accommodation
Holiday accommodation
Camping facilities and caravan pitches
Rights to fell and remove standing timber
Parking
Mooring rights
Sports facilities
Theatre boxes

NEW DWELLINGS

The grant of a major interest (i.e. the sale or letting for a period exceeding 21 years) in a new dwelling or dwellings by the person constructing it or them is zero- rated.

Zero-rating also applies to the sale by the person who has converted the building of a dwelling newlyconverted from a non-residential property. The zero rating only applies where the new dwelling does not contain any part which was previously residential.

A dwelling will also qualify as new and therefore be zero rated on sale or long lease if it was a pre-existingproperty, originally constructed as a dwelling, but which has not been occupied as such for at least 10 years at the time of sale or lease.

SUBSTANTIALLY RECONSTRUCTED LISTED DWELLINGS

A further relief exists for the developer in the circumstances where a listed dwelling is refurbished. If it is regarded as substantially reconstructed, the sale or long lease will be eligible for zero-rating.

This means it must have either been gutted or at least 60% of the cost of the building work involved in reconstructing it must relate to work which would have been eligible for zero-rating, had an external contractor carried it out. That is to say, it consisted of approved alteration work, rather than repair and maintenance.

NEW RELEVANT RESIDENTIAL BUILDINGS

The developer of a new “relevant residential” building may zero-rate the sale or long lease of that building, provided that he is in possession of the relevant certificate from the purchaser or tenant.

NON-DEDUCTIBLE INPUT TAX

Developers are not entitled to claim input tax on certain items incorporated in dwellings and residential buildings for sale or long lease. The list varies from one kind of building to another. As regards dwellings, the major items affected are:

Prefabricated furniture or materials for the manufacture thereof
Electrical or gas appliances, unless they are designed to heat space or water or to provide ventilation, air -cooling, air- purification or dust extraction
A burglar alarm, fire alarm or fire safety equipment for summoning emergency aid
A lift or hoist
Carpets and carpeting material
Any item not ordinarily installed by a builder in a dwelling

THE OPTION TO TAX

In some instances it may be appropriate to opt to tax land and buildings. The strictly correct name for this is the election to waive exemption.

It is only the person who opts and it is therefore incorrect to say that the building is “opted”. This is critical, as one person’s option does not have effect over any other person. It follows that a tenant whose landlord has opted is not automatically obliged to charge VAT on any sub-lease and that such a tenant who wishes to charge VAT must exercise the option in his own right.

Once exercised the option to tax is irrevocable for 20 years (and then only subject to Customs permission)

although it may be revoked in 3 months if:

No rent has been charged or received
No input tax has been claimed in relation to the building which would not have been claimable apart
from the option to tax and
The property has not been transferred as a going concern

For detailed further information on the Option to Tax, please contact us.

Disclaimer

These notes represent an outline for the relevant provisions and are not intended to be exhaustive. No action should be taken on the basis of the information contained herein in respect of any specific case without obtaining the necessary advise. No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by Charlton Baker.