VAT on New Build Residential Development

Whether you are building a new home to live in or you are involved in a property development business for new residential dwellings it is important you understand what rates of VAT apply at construction and also what happens post completion.

The first thing you need to clarify is that the property you are constructing qualifies as a new dwelling. New means it does not incorporate any part of an existing building, other than the foundations or a basement. Also, if planning consent includes a condition that means 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 of new buildings designed as dwellings. Zero rating 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; paragraph 13.8 gives examples of those materials which are “ordinarily incorporated” and 13.9 gives examples of those materials which “are not ordinarily incorporated”.

It is normal for site preparatory works to be required before construction commences. It is possible for these works to be zero-rated if supplied in the course of construction, i.e. if you clear the site and then commence with the new build. If the site is cleared and then circumstances change and you decide to sell the newly cleared land then VAT at the standard rate needs to be charged on the preparatory works.

All services supplied by the main contractor and also the various subcontractors are eligible for zero-rating, provided these services are made in the course of construction.

If you purchase materials directly from a builder’s merchant, these 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. HMRC lists the following as indicators that construction has completed:

• A certificate of completion has been completed
• The terms of the planning consent
• The building is occupied or sold; and
• The intention of the developer

Snagging work which is normally carried out after completion 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 you have paid depends on whether your initial intention is to live in, sell or rent the new dwelling you are constructing.

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 the costs on your VAT returns.

If however 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.

Finally, if you are building a new family home to move into you are not classed as a business and there is an alternative system which allows the recovery of any VAT suffered on costs. Upon completion of the property you have 3 months to submit a ‘DIY Claim’ to HMRC. Once they have reviewed and approved it you will receive a repayment.

In both cases 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. If you include the incorrectly charged amount on your VAT return or ‘DIY claim’ HMRC will not repay this amount as it is technically not VAT.

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 technical team on 01522 531341 or email david.barraclough@wrightvigar.co.uk – we would be delighted to have the opportunity to help you!