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)
