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.
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. 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.
 HMRC v J3 Building Solutions Ltd  UKUT 253
 Group 5 Schedule 8 of the Value Added Tax Act 1994