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Demolished wall

VAT: Zero-rating hangs on a wall

28th Jul 2017
VAT Exchange Limited
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Marie Stein reviews a case concerning the zero rating of construction work, which was determined on the basis that half a wall was left to stand.

Construction services

The issue in the Upper Tribunal (UT) case of HMRC v J3 Building Solutions Ltd was the VAT liability of construction services on the site of an existing property in Gosforth, a suburb of Newcastle upon Tyne. The question was: should the services be zero-rated as construction of a new dwelling, as the taxpayer claimed.               

The decision of the FTT was in favour of the taxpayer, but this was overturned by the UT.  However, it's the original decision of the FTT that makes this case interesting.


The property was previously a coach house used as a dwelling, with some modern flat roof extensions and some adjoining land. The entire property was demolished apart from the northern and western exterior walls and part of the southern exterior wall. There was, apparently, no statutory planning consent or similar that required the retention of any of the walls.

The VAT Act, 1994, Schedule 8, Group 5 contains the basic provisions that allow zero-rating for the construction of new dwellings. This includes several accompanying notes that include various conditions for a range of situations including those where a dwelling is constructed on the site of a previously existing building. 

Note 18

This note 18 was added to Group 5 in 1995. It states that a building only ceases to be an existing building when:

"(b) The part remaining above ground level consists of no more than a single façade or where a corner site, a double façade, the retention of which is a condition or requirement of statutory planning consent or similar permission.”

Note 18 was specifically introduced to deal with situations such as those at the Gosforth property, to provide clarity where external walls have to be retained due to planning consent or similar. The UT ruled that the construction services were specifically excluded from zero-rating due to the wording of Note 18(b). 

The UT decision fits with my own interpretation of the legislation. 

FTT decision

The original ruling by the FTT was based primarily on precedent from a number of important VAT cases relating to new construction. The FTT paid particular attention to the provisions of Note 16 to Sch 8, Group 5, which deals with different types of construction work including extensions and alterations. 

The primary factor in most of these cases was whether the extent of alterations, extensions or other work on existing buildings (i.e. those not demolished to ground level) was sufficient in scope that any previous dwelling ceased to exist. 

The problem was that the cases discussed by the FTT were mostly decided before the addition of Note 18 in 1995, so those cases didn't take the provisions of Note 18 into account.  In fact, Note 18 was specifically introduced to deal with circumstances such as those at the Gosforth property, more than 20 years before the FTT ruling. 

What does Note 18 mean?

The FTT did consider whether Note 18 was relevant, but decided that it did not apply to the Gosforth property because in that case, “more than two walls were retained”. The FTT therefore took the view that Note 18 was not relevant and that zero-rating could apply based on the principles from prior case-law.

Strange approach

It seems as though the FTT spent so much time and energy considering Note 16 and the supporting case law, that Note 18 was just a nuisance, so the FTT had to find a reason to discount the Note 18 provision.

I find this approach very odd. It has always been my understanding that the statutory law as it exists takes precedence over case law, so the FTT's reliance on case law precedent to the extent that it ignored the clarifications in note 18, seems somewhat strange. 

In the end, the FTT ruled that the provisions of Note 18 didn't apply to the Gosforth case, even though it seems quite clear to most of us that Note 18 was designed to deal with such cases. I hope that this decision of the UT removes any doubt about how Note 18 should be applied in the future.

Replies (3)

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Chris Caspell CTA TEP
By ccaspell
31st Jul 2017 12:47

So is the UT saying that this is not a new dwelling (and so zero-rated) because Note 18b says that, in this case, it hasn't ceased to be an existing building because walls had been left up and that wasn't a planning requirement?

Thanks (0)
Replying to ccaspell:
By gilderda
31st Jul 2017 17:20

That's my reading of it too.

More than one wall (or in the case of a corner, two walls) were left standing - in this case, two and a bit - so Note 18b says it hasn't ceased to be an existing building.

The planning permission point would presumably only come into it had the south wall been demolished entirely, leaving just the two walls of a corner?

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Replying to gilderda:
Chris Caspell CTA TEP
By ccaspell
31st Jul 2017 17:34

Isn't VAT interesting ;-)

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