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Developers beware: Courts give narrow definition of ‘new build’ for VAT purposes.

The Upper Tribunal recently ordered a developer to pay VAT on a redeveloped dwelling after deciding it was a reconstruction of an existing building rather than a new build[1].

The decision is a reminder to developers to be sure about whether they are constructing a new dwelling or renovating an existing one. The latter will be subject to VAT at 20% which can have a big impact on margins and profitability of the development.

To VAT or not to VAT?

The construction of a new residential building will not be subject to VAT[2]. VAT will be due on any other works including conversions, reconstructions, extensions or alterations of an existing building.

A building only ceases to exist when it is completely demolished, except for one façade (or two if it is a corner plot), where required by planning permission.

Court’s take the narrow view

The Upper Tribunal was asked to decide whether a property that was demolished save for three exterior walls ceased to exist for the purposes of paying VAT.

The Court decided that the work did not qualify as a complete demolition, meaning the developer had to pay 20% VAT on the dwelling.

The decision indicates that the courts will take a very strict and narrow interpretation of the legislation, choosing to decide whether the development is a new build or reconstruction as a matter of fact rather than a broader interpretation of the works undertaken.

Key take away's for developers

  • If you are undertaking a substantial but not complete demolition you will likely have to pay VAT based on the wording of the legislation and subsequent judicial interpretation.

  • If you are taking a decision on a new development it is recommended that you err on the side of caution. Seek legal advice if you have doubts about its status.

[1] HMRC v J3 Building Solutions Ltd [2017] UKUT 253

[2] Group 5 Schedule 8 of the Value Added Tax Act 1994

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