VAT on New Build Residential Development

Whether you are a property development business, or building a home to live in, it is important you understand what rates of VAT apply on construction of a new dwelling and how VAT can be recovered.

The first thing to clarify is that the property being constructed qualifies as a new dwelling. New means it does not incorporate any part of an existing building, other than the foundations or a basement. If planning consent includes a condition that a facade must be retained this still qualifies as new. Demolition of the existing building must occur before construction of the new building.

VAT on Construction

Zero rating is available in the course of construction, by main contractors and also subcontractors, of new buildings designed as dwellings and applies to the supply, of:

• Services, other than those of an architect, consultant or a person acting in a supervisory capacity; and
• Materials which are “ordinarily incorporated” in a building supplied by a person supplying zero-rated services in connection with those services. There are 2 useful lists contained in HM Revenue & Customs VAT Notice 708: Buildings and Construction; which give examples of those materials which “are” (paragraph 13.8) and those materials which “are not” (paragraph 13.9) ordinarily incorporated.

Site preparatory works required before construction commences can be zero-rated if supplied in the course of construction, i.e. if you clear the site and then commence the new build.

Materials purchased directly from a builder’s merchant will always be subject to VAT at the standard rate.

Work carried on after completion cannot be zero rated therefore the standard rate of VAT applies. Although snagging work can be zero rated if it is provided by the supplier involved in the initial building work and it forms part of the contract.

Recovery of VAT

Claiming back VAT paid depends on what you intend to do with the new dwelling.

The first sale of the freehold or grant of a major lease (terms exceeding 21 years) is a zero rated supply for VAT. As a property developer this means you are eligible to register for VAT and reclaim on your quarterly VAT returns.

If you plan to rent out the property this is an exempt supply, which means you are unable to recover any VAT you have paid out on this project.

If a purchase invoice incorrectly includes VAT at the standard rate your only recourse is to dispute this with the supplier and request an amended invoice. HMRC will not repay this amount.

VAT can prove a minefield for any business, whatever sector you operate within. At Wright Vigar we have a team of technically qualified experts who are able to advise you on the best solution for you and your business.

Simply call David Barraclough or one of the Property Team at Wright Vigar on 01522 531341 or email david.barraclough@wrightvigar.co.uk – we would be delighted to have the opportunity to help you!