Yet another case about the scope of zero rating in the context of new build dwellings has been heard before the First-tier tribunal (FTT) .
A new dwelling can be constructed free of VAT where an entirely new building is constructed or all that remains of the existing building is a single façade or a double façade on a corner site which are retainedas a condition or requirement of planning consent.
The VAT law also states that the construction of a building does not include—
(a) the conversion, reconstruction or alteration of an existing building; or
(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or
(c) ...... the construction of an annexe to an existing building.
The recent legal developments that have muddled the above rules is the concept that the retained façade rules are not the only instance where a qualifying new building can incorporate parts of the pre-existing building and still be zero rated. It has been held (in the Upper Tribunal (UT) decision case of Astral Construction) that zero rating can apply where works can be best described as the construction of a building and not fall into any of the exclusions listed above (eg conversion, reconstruction, enlargement etc) then zero rating can still apply even though the retained part amount to more than a single or double facade. This approach which is resisted by HMRC introduces an element of uncertainty into the task of establishing the whether a project is zero rated or not .
In the tribunal decision of J3 Building Solutions Ltd (released May 2016) the building contractor and his representative argued that the works amounted to the construction of a new building and were zero rated despite the fact that some parts of the pre-existing dwelling were retained, namely two walls on a corner the building that eventually formed the outer skin of the new building in that part of the site. They also contended that if the works did not amount to a new build then the retained walls were either not part of the new dwelling or if they were facades forming part of the dwelling then they were a double facade on a corner site and retained as a condition or requirement of planning consent and therefore zero rating applied to the works.
HMRC argued that the VAT provisions which specifically exclude the reconstruction or alteration of an existing building from the zero rating were applicable due to the retention of parts of the pre-existing building and that the retained facades were not part of a corner site nor retained as condition or requirement of planning consent.
The FTT found that as a matter of fact and degree that the works amounted to the construction of a new building and were zero rated despite the fact that some parts of the pre-existing dwelling were retained, namely the two boundary walls which visually formed a corner of the new dwelling and parts of a further external wall. The tribunal said that what was done could not possibly be described as alteration of an existing building stating “Demolition is not alteration, and the only parts not demolished were not altered”.
This decision has been appealed by HMRC to the Upper Tribunal who are understood to be relying on the Upper Tribunal decision in Boxmoor Construction Ltd – a case HMRC won where a house was largely demolished and replaced – the key difference between Boxmoor and J3 is that in Boxmoor the Upper Tribunal stated that the First Tier Tribunal would have classified the works as alteration works to an existing building if they had been asked to determine the nature of the works and therefore the works could not be zero rated. In J3 the tribunal was very clear that they thought the works were of a new building based on the facts. It will be interesting to see how the case is argued when it eventually comes to court in 2017.