new structure’s design. VAT legislation states that an existing building must be completely demolished to ground level in order for it to qualify as a “new build”, albeit the retention of a single or double facade can be ignored, if it is retained as a condition or requirement of the planning permission. This is commonly referred to as the ‘demolition test’. Such situations can cause confusion for contractors and developers when it comes to determining their VAT position.

The recent decision in the case of HMRC v J3 Building Solutions offers some clarity in this area. Specifically, the ruling highlights how planning ahead and making small changes in the early stages of a project could help to minimise a developer’s VAT liability.The building works in this case involved the substantial, but not entire, demolition of an existing building, with the new building retaining two exterior walls and part of a third exterior wall. VAT legislation states that zero-rating relief on the construction of new dwellings does not apply to the conversion, reconstruction or alteration of existing buildings. Similarly, it does not apply to the enlargement or extension of an existing building unless this leads to the creation of an additional dwelling or dwellings. In this

case, as the existing building had not been demolished to ground level and incorporated more than a double facade, it was determined that the building that was constructed could not be classed as ‘new’ and therefore should not quality for a zero VAT-rating. As such, the Upper Tribunal overturned the earlier decision of the First Tier Tribunal, which had concluded that, as a matter of fact, degree and impression, a new dwelling has been constructed for VAT purposes, despite the demolition test not being satisfied.

The ruling in this case presents developers with a paradox. While including elements of an existing building into a new development may be perceived as a key part of a project’s cost reduction strategy, developers may find they are in a better VAT position if they start from scratch.

However, as it is possible for developments incorporating elements of existing buildings to be zero-rated for VAT, if planning permission has been granted which requires the retention of building facades, it is important that developers evaluate their VAT position carefully at the outset, on a case-by-case basis. Questions around zero-VAT ratings for new builds have long been confusing for residential contractors and developers and recent case law has been decided in HMRC’s favour. Developers and contractors should also bear in mind that these recent case law decisions are not set in stone and could be appealed. However, with careful consideration and planning, developers can avoid potentially costly mistakes and make sure their profits are optimised.

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