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VAT: Building up £60k of trouble

A builder who failed to distinguish between standard-rated, reduced-rated and zero-rated work, and kept inadequate accounting records, was required to pay undeclared VAT of £59,184.

4th Mar 2020
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Building A New Extension

Running a construction and separate residential property development business requires an understanding of complex VAT rules.

Gareth Bertram [TC07524] was assessed for £59,184 VAT because he wrongly charged VAT at the reduced rate. The poor quality of his records led HMRC to make a “best judgement” calculation. The FTT allowed the appeal in part, but accepted HMRC’s methodology in its best judgement calculation.

The two businesses

Bertram supplied his building services to a property development company (PropCo).

Propco developed 25 two-storey residential semi-detached houses for conversion to houses in multiple occupation (HMO). All 25 properties were fitted with new extensions and 14 were converted to separate dwellings, in these cases planning permission was sought during construction.

The FTT accepted that the cost to convert the properties into HMOs was minimal, often involving only the fitting of locks, although some properties required more major works. Bertram treated all his construction supplies to Propco at the reduced rate of 5% VAT.

HMRC’s assessment

HMRC could not establish from Bertram’s records exactly what supplies had been made to each property. The HMRC officer decided that most of the £100,000 expenditure incurred applied to the extensions which should have been standard rated. A straight-line calculation was used to value the supply to each of the 25 properties, except where it was clear that a supply had been made to a specific property.

VAT and residential works

Reduced rating at 5% was introduced to encourage developers to improve existing housing stock. It applies where services and or building materials are supplied in respect of qualifying conversions, primarily a change in the number of dwellings, an HMO or a special residential conversion (VATA 1994, Sch 7A, Gp 6 and 7). In addition, zero-rating for new dwellings already existed for new-build homes (see VATA 1994, Sch 8, Gp 5).

What did the FTT find?

The FTT accepted that some costs must have been attributable to the fitting of locks for HMO conversion, so it allowed £1,000 per property to be allowed for reduced-rate works, and for any works to properties that might be in poor condition.

Properties converted to an HMO and then extended, had to have been empty for two years for the reduced rate to apply. However, Propco would let the properties immediately on acquisition, negating this requirement, and in those cases the extension works failed the reduced-rate test.

Finally, Bertram seemed unaware of the potential for zero-rating the new self-contained dwellings that he built following the HMO conversion. The FTT accepted HMRC’s argument that zero-rating applied but only where planning permission had been obtained before works started. Bertram could not wait and see if planning permission was granted before deciding on liability.


Bertram’s business model maximised cash flow. He identified the best properties for conversion but he didn’t let them directly to tenants, and instead let via a letting company.

He took a broad-brush approach painting all supplies as reduced rated which of course helped Propco as all VAT was irrecoverable. Unfortunately, by immediately letting the properties to letting agents and then building extensions, the properties would fail the two-year test for reduced rating to apply.

Bertram also appeared to misunderstand the zero-rating rules where extensions created new-build dwellings. This ignored the complex and convoluted provisions which needed to be understood. Finally failing to keep adequate records helps no one, and suggests to HMRC that the taxpayer has a wrong attitude to compliance.


A reading of the VAT legislation shows how complex this area is, although VAT Notice 708: Buildings and Construction, para 3 for new-build and paras 7 and 8 for residential conversions, does its best to explain.

Simply treating all outputs as reduced rated without an understanding of the complex rules is asking for trouble. The haste to let the HMOs and to get a good cashflow was offset by the fact that the two-year rule for empty properties was not satisfied.

Bertram also lumped all of his extension works under the one umbrella when some of them actually qualified for zero rating.

Seeking expert advice prior to starting the work, and reading the VAT notice 708, would have helped avoid the VAT problems. Finally a lack of basic records to show an audit trail linking expenditure to outputs will always flag up warning signs when HMRC visit.

Replies (3)

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By Ian McTernan CTA
04th Mar 2020 12:15

This is an excellent case highlighting the complexities (as well as the large sums involved) of VAT in connection with properties, and why professional advice should always be sought. It doesn't cost that much and they will give you chapter and verse, which saves a lot of hassle further down the line.

Personally I always get chapter and verse from a VAT expert on these type of property transactions due to the very large sums involved!

Thanks (3)
Hallerud at Easter
04th Mar 2020 15:49

Thanks- really interesting read.

Maybe some of those in practice can use it to encourage their clients in the building/construction industry that quality of records matters (from my experience often not a big consideration for development/construction contracts, especially when possibly mixed supplies)

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By flightdeck
05th Mar 2020 15:35

It is all very complicated, I do agree.

But I'm not sure I've read a new article yet where someone has inadvertently paid too much VAT - always seems to work one way?

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