Thursday, 24 March 2011

VAT trap for gung-ho builders

Issues of Stamp Duty (SDLT) and VAT don’t usually feature in this blog, but my attention has been drawn to a recent decision of the First Tier Tribunal (Tax), released on 2 March, Abbeytrust Homes Ltd v HMRC [2011] UKFTT 150 (TC), which must ring alarm bells for anyone who goes ahead with the construction of a new dwelling without first getting planning permission.

In this case the Tribunal decided that construction services supplied in the course of construction of a new dwelling were standard-rated because the relevant provision in Schedule 8 to the Value Added Tax Act 1994 requires that in order for such a supply to be zero-rated “statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent”.

The developer did obtain retrospective planning permission, but the Tribunal held that in order for zero rating to apply, planning permission must have been obtained before the VATable supply (of building services) is made. It is clear that the position taken by HMRC is that in order to qualify for zero rating, express planning permission for the construction of a new dwelling is required before work commences and the dwelling must then be constructed in accordance with that permission, and this view was upheld by the Tribunal.

The Tribunal also agreed with HMRC’s contention that if in the course of the supply of construction services the supplier receives payment in advance in respect of those supplies, this brings forward the tax point irrespective of whether or not the supplies of building services have been completed. Section 6(4) of the VAT Act applies when the supplier receives payment before issuing an invoice and fixes the time of supply as the time that the payment is received. So the builder should not even receive an advance payment before planning permission has been issued if zero-rating of the building works is to be preserved.

In this particular case, HMRC had also contended that the building works were standard rated because they involved the demolition and replacement of an existing dwelling, and so did not qualify as the construction of a new dwelling. The Tribunal does not seem to have made a ruling on this point, and I am bound to say (as a planning lawyer, but not a tax lawyer) that such a position would be illogical. There must be many situations in which demolition has to take place before new dwellings can be built. The subsequent erection of the new building must surely qualify as “the supply in the course of the construction of a building designed as a dwelling of any services related to the construction” irrespective of the prior demolition of a pre-existing building.

In our firm we have some fairly high-powered tax lawyers, so I am happy to leave it to them to debate that last point, but as a planning lawyer I see serious implications for my builder clients if they start work on site before a planning permission has been issued or if it is subsequently claimed (whether by the LPA or by HMRC) that the resulting dwelling or dwellings were not erected strictly in accordance with the planning permission.



  1. Presumably if the work is carried out contrary to, dare I say it, a condition precedent, the work will not be lawful and VAT will be payable.

  2. Chris Kendall has correctly identified one of the problems this decision potentially poses. However, as will be seen from various other posts on this blog, development in breach of a condition precedent does not necessarily render the development unlawful. Even where it was commenced unlawfully this can be retrospectively validated (see the relevant passage in Whitley & Sons which I have previously quoted), and this validation would itself appear to relate back to the commencement of development, unlike a retrospective planning permission, which is effective only from the date it was issued. Nevertheless, there is clearly scope for argument on this point, and so we may well see more litigation on this topic.