If you’re in the building trade not only do you have to contend with HMRC’s construction industry scheme (CIS) but sometimes you need to be a VAT expert too. When can you zero-rate your services for a building project?

Different rates

When you make supplies to a private customer, or a business which is wholly or partly exempt, e.g. a charity, VAT is a significant part of the cost to them. Even for businesses which can reclaim the VAT you charge it can make a dent in their cash flow and borrowing requirements, especially if it’s a large project. It’s therefore to your and their advantage to zero rate your supplies if you can.

Build or rebuild

An example of where VAT is a significant factor is when a building has or will be demolished and a new one constructed.

Trap. Subject to conditions, constructing a new residential building is a zero-rated supply, but rebuilding one is standard-rated. You shouldn’t apply the standard rate as the easy option; you must zero rate whenever the rules say so.

What the law says

HMRC in its usual way tends to be economic with its general guidance on zero-rating. It says that a new building only applies to a rebuild where “any existing buildings on the site have been demolished completely to ground level” . However, the legislation explains that a building counts as demolished where “the part remaining above ground level consists of no more than a single facade or where a corner site, a double facade, the retention of which is a condition or requirement of statutory planning consent” .

Tip. When considering the VAT rate to apply check the planning permission for the work. If it only requires one or two facades to be retained then it is probable that zero-rating can apply.

A tribunal case

Just to reinforce the point about HMRC’s somewhat narrow approach to zero-rating, the First-tier Tribunal (FTT) made an interesting ruling in May 2016. J3 Building Solutions Ltd had virtually demolished an existing residential property but kept two walls, which wasn’t a requirement of the planning consent. Naturally, HMRC decided that the building that took its place was a “reconstruction” (rebuild) which didn’t meet the zero-rating conditions. However, the FTT decided that the building wasn’t a reconstruction at all, but actually a completely new building and therefore zero-rating applied.

Revisiting the past

This was the second similar ruling in three years, which throws doubt over HMRC’s ability to objectively consider how the law applies based on the fact. Its approach is often to see the position as it wants rather than starting with an open mind.

Tip. You can ask HMRC for an opinion in advance regarding whether a build should be zero or standard-rated. Where you think zero-rating applies, emphasise to HMRC the facts that point to this. If you can persuade it on zero-rating, it might give you the edge when quoting for work.