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Supplies ‘in the course of construction’

11th Mar 2019
VAT Consultant
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We are seeing more cases where HMRC are restricting the definition of construction services, and whether they are made in the course of construction of a dwelling (Sch 5, Group 8, Item 2).

This affects whether those services can be zero-rated and/or when the date a dwelling is finished for the purposes of the DIY scheme. Since the client is usually a private person, the consequence is higher project costs.

HMRC guidance is found in Notice 708, para 3.3. This refers to ‘work closely connected to the construction of the building’ (para 3.3.4). There is background material in VCONST02500.

I was reading an unusual case from 2004 which asked the same question. In Dart Major Works Ltd, the question was whether demolition works carried out by Dart should be properly zero-rated as services in the course of the alteration of a listed building. Although this zero-rating has long gone, the same principle still applies.

HMRC guidance referred to above reflects the words of Lord Justice Clerk in Rannoch School Ltd, quoted in para 23 of the Dart decision:

Counsel were agreed that "in the course of" refers to services done contemporaneously or consecutively in relation to a new building, and that in addition the services supplies must have a substantial connection with the new building. It is plainly a question of degree.

This temporal connection test is explained further in the decision of St Mary RC High School:

there has to be a temporal connection between the construction of the building and the provision of the other services if those other services can be said to have been provided in the course of construction of the building. Usually those services will be provided contemporaneously with the construction of the building or nearly so, but that may not always be the case. When it is not, it will be necessary to consider both the reasons for and the length of the delay before deciding whether or not the temporal connection is established. Questions of degree may be involved and the facts of a case may permit of two different views.

These cases provide guidelines in considering services carried out contemporaneously or consecutively, and whether those services are carried out in the course of construction (and therefore are zero-rated or reduced-rated) or not (and therefore become standard rated).

In applying the principles established in these cases, the Tribunal in Dart asked, “if there was a consecutive flow of events.” It concluded that, even though services were carried out consecutively (rather than contemporaneously), and there being some time lag, those services were still supplied “in the course of alteration” and were therefore zero-rated.

I find this helpful for two reasons:

  1. Sometimes supplies of specific goods are delayed for reasons beyond the control of the client or the main contractor. This of itself does not prevent zero-rating.
  2. HMRC seem to insist on services being supplied contemporaneously rather than consecutively. This case and its precedents help to refute HMRC’s narrow approach.

The Dart Major Works Ltd decision is here:

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