Builders and Developers – VAT Zero Rating of Residential Property – Watch Out!

A developer thought that he had constructed a new dwelling and that the sale of it was a zero rated supply so that the input VAT incurred in relation to the redevelopment was recoverable. HMRC decided otherwise.

The brief facts were as follows:

The property was in London and the developer intended to demolish the existing building and construct a new house. However, because of the way the original building had been constructed, there was a risk that the party wall between the property and the neighbouring property might fall down. Accordingly, the developer chose to retain one half of the front facade of the property to provide support to the party wall.

When the property was sold, HMRC asserted that zero rating did not apply because the original building had not been completely demolished. It assessed that the developer should pay £45,295 VAT (plus penalty interest) and treated the sale of the property as an exempt supply, so that no input VAT was recoverable.

The developer appealed but the First Tier Tax Tribunal upheld the HMRC assessment.

Zero rating requires the property to be “demolished completely to ground level”. Whilst HMRC could have exercised a discretion to disregard the retention of the front facade, which after all was only done for safety reasons, they chose not to.

The Technical Details
The sale of a new dwelling is a VAT zero rated supply. The VAT Act 1994 (para 1, group 5 of Schedule 8) provides for the zero rating of “the first grant by a person:
(a) constructing a building: (i) designed as a dwelling or number of dwellings … of a major interest in, or in any part of, the building, dwelling or its site.”

The statutory notes under group 5, note 16, says: “for the purpose of [group 5] the construction of a building does not include: (a) the conversion, reconstruction or alteration of an existing building.”

Note 18 states: “a building only ceases to be an existing building when:
(a) demolished completely to the ground level; or
(b) 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 or similar permission.”

The problem for the developer in this case was that the facade had not been retained as a condition of the planning permission, it had been done for safety and pragmatic reasons.


M Lennon and Co Ltd v Revenue and Customs [2015] UKFTT 296 (TC)


Roderick Campbell

Partner, Head of Commercial Property

Roderick has specialised in property law for 30 years. He trained with Hart Brown, qualifying in 1985 and became a Partner in 1990. He specialises...

Roderick Campbell- Head of Commercial Property

Partner, Head of Commercial Property

Roderick Campbell

Roderick has specialised in property law for 30 years. He trained with Hart Brown, qualifying in 1985 and became a Partner in 1990.

He specialises in all aspects of non-contentious commercial property work including freehold and leasehold acquisitions and disposals; residential development work; options; conditional contracts, development agreements and land promotion agreements. He acts for a broad range of clients including property companies, developers, owner/occupiers and SMEs.

Hart Brown is recognised in the Legal 500 2024 edition for real estate work in the South East and the entry states “Practice head Roderick Campbell is experienced in handling all aspects of non-contentious commercial property work for a broad range of clients, recently specialising in acting for large residents’ associations that manage freehold estates."

In 2008 he published a book on “Methods of Securing Development Land Overage”. He also holds an LLM Masters Degree in Advanced Commercial Property Law with distinction.

He is a member of the Law Society Property Group and LawNet Commercial Property Group.

His most memorable case was acting for a landowner on the grant of an Option Agreement concerning an M25 service area which lasted for some 12 years between exchange and completion!