A property owner who demolishes an existing dwelling house and replaces it with an entirely new one is entitled to reclaim VAT on the costs of construction – but what happens if part of the original building is retained? A tribunal considered that issue in a case that clarified the law.
A company had demolished all but two walls, and part of a third, of a coach house before constructing a replacement that was of greater height and had a larger footprint than the original. Its argument that the costs of construction were zero-rated for VAT purposes – and that it was thus entitled to a rebate exceeding £40,000 – found favour with the First-tier Tribunal (FTT).
However, in upholding an appeal against that decision by HM Revenue and Customs, the Upper Tribunal found that the FTT had erred in its interpretation of the relevant parts of the Value Added Tax Act 1994.
The Act provides that zero rating does not apply to conversion, reconstruction or alteration of an existing building. Subsequent amendments to the statute also stipulate that a building only ceases to be an existing building if it is demolished completely to the ground.
The sole exception to the latter requirement is where the only parts of the original building retained are facades that are required to be kept in place as a condition of planning consent. Parts of the coach house had been left standing and, as the exception did not apply, the relevant works were deemed to be alterations to the existing building and therefore no rebate was payable.
Source: Concious