Neil Warren discusses the quality of evidence needed to show that a property has been empty for 10 years to get a reduced VAT rate on certain building supplies.
The FTT case of Fireguard Developments Ltd (TC06514) considered the question of whether two houses situated next to each other in Southport had been empty (not lived in) for more than 10 years, and therefore qualified for zero-rating when they were sold (Item 1(b), Note 7, Group 5, Sch 8, VATA 1994).
If the empty period was less than 10 years, the sales would be exempt rather than zero-rated for VAT, meaning that input tax on all the project costs would be blocked under partial exemption.
The evidence provided by the taxpayer to support the 10 year empty period was a sworn statement supplied by the previous owner certifying that neither property had been lived in since 2005/06, so the sales of the properties in July and June 2017 were treated as zero-rated by the company. HMRC challenged the evidence and disallowed input tax of £14,118 claimed on the company’s December 2016 VAT return.
HMRC accepted before the hearing that one of the properties had been empty for more than 10 years so qualified for zero-rating. However, it produced the following independent evidence that confirmed the other property had been occupied until November 2008:
- PAYE records for an employee who was living at the address;
- evidence from Sefton Council that council tax was paid until 27 November 2008; and
- electoral register entries for two people who lived there from 2008 to 2009.
The court considered the PAYE and council tax data was the key evidence – with the electoral register not contradicting what these records were suggesting. The appeal was dismissed in relation to the second property.
HMRC was generous in accepting the 10 year period had been met for the first property, which also appeared to be occupied until 2008. This was quite a good result for the taxpayer.
The key message is that independent evidence from third parties is needed when empty periods are relevant to a VAT outcome, such as council tax and electoral register information.
A couple of years ago, I had a query from an accountant about the VAT rate relevant to building services being provided by a client to a property developer. The builder had been given a statement signed by the developer’s accountant, certifying that the dwelling in question had been empty for more than two years and therefore qualified for a reduced rate of 5% on builder services. What would your advice be in this situation?
The developer is correct that building work is subject to 5% VAT if it is carried out on dwellings that have been empty for at least two years (VAT Notice 708, section 8).
This reduced rate also applies to materials supplied by the builder as part of his work. But the builder can only apply this rate if he receives independent evidence from a third party such as the local council or electoral register data to confirm the empty period. This evidence must be retained by the builder as part of his accounting records in the event of a future query by HMRC (see VAT Notice 708, para 8.3.2 for HMRC’s view of the evidence which will be acceptable).
The letter signed by the accountant was not good enough, just as the sworn statement signed by the previous property owner in the Fireguard case was equally insufficient. Important lessons for everyone!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.