Building a new flat – can it be zero-rated?

Building a new flat – can it be zero-rated?

You own a block of flats and want to increase the number of flats in the block. What can you do? You could rearrange the number of flats in the block so you have more smaller flats. Might go down badly with current tenants and may be less attractive to new tenants. How about adding a new flat on the top of the building?

Would the cost of constructing the new flat be liable to VAT at the standard rate (currently 20%)?

It depends!

First would it be classed as a new dwelling? To be a dwelling it needs to meet three criteria. These are:

  • it consists of self-contained living accommodation;
  • there must be no internal access to any other dwellings or part of a dwelling; and
  • the planning permission has to:
    • allow for the separate disposal of the flat;
    • be for the dwelling; and
    • be complied with.

You can find this information in Section 14 of VAT Notice 708: buildings and construction.

Can the construction services be zero-rated? First, there’s an example of what could be zero-rated elsewhere in VAT Notice 708 that says that “a new eligible flat built on top of an existing building can be zero-rated.” That seems to fit the bill.

I was asked about this recently as the builder who was constructing the new flat was adding VAT at 20% to their invoices. This is strange and the builder has apparently refused to do the work zero-rated. Maybe they have had a bad experience with HMRC.

The problem is that the customer is unable to recover the additional 20% being charged because they are ineligible to be VAT registered. Even if they were VAT registered the extra 20% would be unrecoverable as HMRC would refuse to allow it to be deducted on the basis that as the supply was zero-rated there is no way the extra 20% could be VAT. For the same reason the customer will be unable to use the DIY Builder’s Scheme to recover the ‘VAT’. HMRC would be happy to take the money from the builder though.

If you find yourself in this sort of situation, whether you are the builder or the customer, please seek advice from a VAT specialist.

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