Frequently Asked Questions

VAT

1) What are the different rates of VAT?

There are three rates of VAT - the standard rate at 17.5%, the reduced rate at 5% and the zero-rate. In addition items may also be exempt from VAT or outside the scope of the UK VAT system.

2) What construction works are VAT zero-rated?

The services provided in the course of construction of a new dwelling, a 'relevant residential purpose' building, a 'relevant charitable purpose' building are VAT zero-rated. In addition approved alterations to a protected building, adaptation works for disabled persons and the construction of a 'relevant charitable purpose' annexe are VAT zero-rated.

3) Can the purchase of building materials ever be VAT zero-rated?

The purchase of building materials can never be VAT zero-rated - it is only the provision of construction services that are VAT zero-rated. Materials bought and installed by a building contractor can be zero rated as part of the construction services provided.

Some materials are VAT standard rated even if provided with zero-rated construction services - this includes certain items of prefabricated or prefinished furniture or materials for the construction of fitted furniture (excluding kitchen furniture), kitchen 'white goods' and some floor coverings such as carpets.

4) Can consultant's fees be VAT zero-rated on a construction project?

The payment of consultant's fees is always VAT standard rated. The only time where they may be zero-rated is where they are subsumed into the contractor's construction services and therefore follow the liability of the principal supply of construction services - this could occur in a design and build contract arrangement.

5) Do charities have to pay VAT - are they not exempt from tax?

Contrary to popular belief charities do not receive much in the way of preferential VAT treatment. The principal relief in the construction sphere is for the zero-rating of various construction services related to 'relevant charitable purpose' buildings which must be used for non-business purposes or as a village hall or similar such establishment. The criteria for qualification are involved and frequent VAT tribunals occur in this area.

6) Are VAT zero-rated and exempt transactions the same thing?

No, they are similar in that the recipient of the goods or services will not pay any VAT to the supplier.

However the supplier of a zero-rated item is able to recover the VAT they have incurred in creating that item eg the freehold sale of a new dwelling is zero-rated and the constructor can recover the VAT they pay out to sub-contractors.

The supplier of an exempt item, for instance, a developer who has repaired an existing dwelling to sell is unable to charge VAT on the sale and is also unable to recover VAT paid out to sub-contractors, consultants and on materials and thus VAT should be brought into the equation when determining the sale price.

7) Are Liquidated and Ascertained damages VAT-able on a construction project?

It is common practice for a building contract to include a clause regarding the rate of damages due to the client from the constructor in the event of non-completion of a contract. This has the effect of allowing both parties to know in advance the financial implications of a late project completion.

These liquidated damages are outside the scope of VAT and therefore should not reduce the amount of VAT already paid on a project.

8) What is the meaning of the VAT agreement in the JCT form of building contract?

The Supplemental VAT agreement to the JCT standard form of building contract clarifies the contractor's obligations with reference to the apportionment of VAT on a construction project. There is a choice of clauses depending on the project type. The choice is recorded in the contract appendix.

If there are likely to be mixed rates of VAT on a development and it is desired that the contractor should make an apportionment for each stage payment eg a mixed use type development then the appendix should record that Clause 1A does not apply.

If there is likely to be a single rate of VAT on a development and it is desired that the contractor should make an apportionment for each stage payment eg a commercial office development then the appendix should record that Clause 1A does apply.

9) Can repairs and maintenance works ever be treated at a reduced or zero-rate of VAT?

Generally repair and maintenance works are VAT standard rated at 17.5%. The only opportunities for treatment at a lower VAT rate arise where the repair and maintenance works are part of a project that qualifies for a lower rate in its entirety and does not specifically exclude repair and maintenance works from being treated at a lower rate. In addition listed places of worship may reclaim VAT on such works through a special grant scheme.

10) What types of work qualify for the 5% rate of VAT?

The new 5% rate of VAT applies to certain works of conversion and renovation in the residential construction sector. Those who benefit the most are those who are not in a position to recover the VAT they incur e.g. private individuals, housing associations and residential landlords.

In addition there is a 5% rate for the installation of certain energy saving materials and security goods.

11) Who is responsible for the correct treatment of VAT on the provision of construction services?

It is the supplier providing the services who is responsible for collecting the VAT on behalf of the government and it is the supplier who will usually be penalised in the event of Customs not agreeing with an assessment on a particular project.

CAPITAL ALLOWANCES

1) What are capital allowances?

Capital allowances are a form of tax relief. They are given on expenditure by a business on the provision of plant and machinery and certain building types for use in their trade. Lessors are also entitled to claim allowances. The value of the allowances to a business or lessor is that they can be set against taxable profits over a number of years following the year of expenditure. The number of years over which the allowances are claimed depends on the particular allowance claimed, the size of the business concerned and the size of the business profits available.

Capital allowances are often considered to be the taxman's replacement for depreciation although businesses that do not depreciate assets are not debarred from claiming allowances - therefore they can be a real financial benefit. In addition they are used as an incentive to encourage commercial investment on, for instance, development in deprived areas or energy saving plant and machinery.

2) Who is entitled to claim capital allowances?

Businesses including limited companies, partnerships and sole traders are entitled to claim capital allowances if expenditure is incurred on certain capital assets used for the purposes of their trade. A property investor who develops and lets a commercial property is able to claim allowances on qualifying plant and machinery in the building that they are letting.

A property developer who only trades commercial property is not entitled to claim allowances as the building is their trading stock rather than used in the course of their trade.

3) What is capital expenditure?

Capital expenditure can be difficult to define. The following court case provides a common explanation:

"…… expenditure made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade…."
Atherton v British Insulated and Helsey Ltd 1925

Work that is new in a new location or could be classed as enhancement of the existing is generally regarded as capital in nature.

4) What about revenue expenditure?

Although capital expenditure for a business provides the possibility of a capital allowances claim a much better result is achieved by claiming expenditure as a trading deduction. In construction terms expenditure can be a trading deduction if it is revenue in nature - which generally relates to repair and maintenance works. Such expenditure can be claimed 100% in the year of incurring the expenditure.

5) What is plant?

Unlike machinery plant is a difficult word to define. There is no definition of the word 'plant' in the Capital Allowances Act 2001 and identification relies heavily upon precedent case law - within the Act there is a table that indicates those items that may be considered plant and machinery. The most quoted definition is as follows:

' In its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business - not his stock in trade, which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.'
Yarmouth v France CA 1887