Whilst many property investors and developers are aware that there is no VAT on new houses – strictly speaking this 
is not technically correct. In actual fact, there is VAT but it is chargeable at 0%. This very fine distinction can make the world of difference.
For example, if a developer can charge 0% VAT on a sale it can also register for VAT and reclaim VAT incurred on the development of the property.
It is therefore very important to determine whether a dwelling qualifies as ‘new’.
Case law found in favour of the taxpayer when determining what constitutes a new dwelling and whether VAT can be claimed in construction costs.
In the recent case J3 Building Solutions Ltd v HMRC the taxpayer demolished an old coach house that had been used as a dwelling and also had several more modern extensions. Parts of the old coach house walls were retained when the new building was constructed and HMRC denied the company’s VAT claim on the basis that it was not a new dwelling but effectively a reconstruction of an old dwelling.
VAT Notice 708 ‘Buildings and Construction’ states that a building qualifies as new if ‘it is built from scratch and before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained).
In this case HMRC felt that too much of the old structure had been retained, although their guidance does provide some fairly specific examples of where parts of the old structure can be retained and still qualify as ‘new’.
The Tribunal disagreed and found in favour of the taxpayer.
This is a useful case because it demonstrates that a qualifying ‘new build’ does not necessarily have to be an entirely new structure; and it also considers whether or not HMRC is correct to assert that any previous building must cease to exist, otherwise any new building is simply an alteration to the previous building and cannot be treated ‘as new’.
The Tribunal concluded that although parts of the previous building have been kept, the new construction does qualify as a new dwelling and the company is eligible to reclaim the VAT on construction costs.
If you’re a property developer or an accountant do get in touch to discuss.
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