Insights

An important aspect of tax planning for construction projects is identifying whether the project can be zero rated for VAT purposes. This can represent a large cost saving and benefits those involved in multiple ways, making the building firm more price competitive and potentially saving a significant amount of money for the commissioner.

Why is a zero VAT rating beneficial?

Having a zero VAT rating on a construction project means:

• Construction companies can offer more competitive prices to clients, which makes a big difference for those unable to reclaim VAT paid e.g. residential property owners, charities, buy to let landlords;
• Loans may be more straightforward to obtain because lenders frequently do not extend financial support to including VAT elements.

Previously the situation was very clear-cut - a zero VAT rating was only available on an entirely new building, either within a new land development, or where the existing building was completely demolished and a new building erected. In well developed residential areas, this has historically created issues for property developers who could often face restrictions from planning departments requesting elements of an existing building to be retained, which would then compromise the possibility of a VAT exemption and cause the works to be standard rated for VAT.

HMRC cases highlight zero VAT opportunity

However recent cases brought before HMRC illustrate that there could be more scope to challenge the rules with regard to previous development work. This opportunity first became apparent following a case on Astral Construction in 2013, in which a development project for a nursing home was awarded a zero VAT rating, in spite of it not being an entirely new building development. Then in May 2016, another case occurred (J3 Building Solutions Ltd) in which the developers argued successfully for a zero VAT rating, yet this building had also not been razed completely to the ground.

These two cases demonstrate that there may be an opportunity for property developers who have been subjected to standard VAT rates on new developments constructed since 2013 to review whether there could be scope to lodge an appeal with HMRC and recover the VAT paid. In addition, upcoming developments of residential buildings could be reviewed to ascertain whether they too could be zero VAT rated, whereas this might have already been discounted.

Reduced VAT rate reminder for construction projects

Remember that in addition to the zero rate relief, there is also a reduced rate VAT relief that can apply to certain construction projects and again for all the reasons mentioned above it is important to ensure you take advantage of this whenever you can.

Time to review Zero VAT ratings on new build property projects

If you are a property developer or planning a development and wish to discuss whether previous or forthcoming developments could qualify for zero or reduced rate VAT status, please contact Anne Eager by emailing ae@rjp.co.uk.