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20 COMMENT


VAT: HOW NEW IS YOUR NEW BUILD?


Robert Facer, VAT director at Menzies LLP


Robert Facer, VAT director at Menzies LLP, discusses how classing developments as “new” can have a dramatic effect on VAT rates.


s construction works are generally subject to VAT payable at 20 per cent, the zero- rating applicable to new builds can have a significant impact on the margins achieved by residential developers, for developments where VAT on costs is not reclaimable. However, recent case law has emphasised how a seemingly minor element of construction for new dwellings can impact the VAT position and, therefore, the overall profitability or cash flows of the project. It is also important for building contractors to apply the correct rate of VAT to their services when involved in residential developments, in order to avoid unexpected VAT demands from HMRC. It is essential that building contractors and developers are aware of how these decisions may affect them if there is any question about


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whether the residential development can be classed as “new” for VAT purposes or not. Whereas budgets for commercial developments must normally take into consideration VAT payable at 20 per cent, construction of new dwellings is currently zero-rated, which is particularly good news for developers working on large-scale residential developments in situations where VAT is not reclaimable. Where construction is taking place on a plot of undeveloped land, this rule is relatively straightforward to apply. However, when redeveloping existing sites, things can get more complicated. For various reasons, such as to keep costs down or comply with the terms of planning permission, developers may decide to incorporate part of an existing structure into the


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