Construction of a Building

The construction of a building designed as a dwelling or to be used for relevant residential/charitable purpose attracts the zero-rate of VAT, subject to certain conditions. One of these conditions specifies that, for VAT purposes, the conversion, extension or alteration of an existing building will not qualify as construction of a new build and will therefore not be liable to the zero-rate - this therefore results in an additional VAT element on the costs of the building works that are undertaken.


This was the basis for a recent case heard by the First-Tier Tribunal whereby the Appellant, J3 Building Solutions Ltd (J3), appealed against the refusal of HMRC to allow construction work carried out at a site to be zero-rated. Prior to the works, a coach house of pre-war origin and a number of modern extensions were located on the site. J3 obtained planning permission from the relevant local authority to demolish all of the existing extensions and part of the coach house, and replace them with a single dwelling with only the north and west walls of the coach house being retained, which formed part of the boundary wall of the site.


By Group 5 of Schedule 8 of VATA 1994, a building only ceases to be an existing building where it is demolished to ground level however under certain particular circumstances it is possible to zero-rate the construction of a building where part of the building is not raised to ground level and is instead retained to form part of the new building.


The Tribunal ruled in the Appellants favour on the basis that the building works undertaken were so extensive that the building constructed on the site was essentially new and that the part of the building that had not been demolished had been altered to such an extent that it represented an entirely separate building.


The high value of building costs can also result in large amounts of VAT being charged and so establishing the correct VAT treatment of a project prior to completion can be highly advantageous. Therefore, if you or your business are constructing new residential buildings that include part of an existing building, or you have undertaken a project such as this in the last 4 years, please contact our free VAT helpline to find out if you meet the specific conditions to zero-rate this supply. 

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