Planning

The construction of a new house, and the materials used by the contractor to build it, are zero-rated. However, architect and other building professional fees, eg; surveyors, supervisors, engineers, project or construction management and consultants, are always standard rated; even in respect of a new build.

This will represent an absolute VAT cost to:

• individuals
• entities which will rent the house(s) after completion
• housing associations (in some circumstances)
• certain entities which are not in business
• any entity which will use the building(s) for other exempt purposes
• entities which do not sell the house(s) – so onward zero-rating is not possible
• any entity which cannot recover all of its input tax for various reasons

Aims

If it is not possible to structure matters so that these fees can be recovered (there are a number ways to do this, but not all will be available to all parties) then advisers need to consider ways to remove the VAT charge – this may also be preferable for cashflow purposes even if full input tax recovery is possible.

VAT Planning

Design and build – the steps

• the housebuilder creates a separately VAT registered design and build company (newco)
• newco purchases the professional services and construction services and incurs the VAT on these (the construction element is zero-rated)
• these supplies are incorporated into a single onward supply of zero-rated design and build services to the housebuilder (a bundle) – the professional services are a cost component of the construction
• zero rating applies to the supply to the housebuilder as the predominant supply of the bundle is the construction of new dwellings
• newco recovers the input tax incurred on professional fees etc, as it relates to an onward taxable supply
• newco is in a repayment position and HMRC refunds the VAT incurred on the costs – often after a pre-cred query

It is also possible to use an independent design and build company, or engage a contractor to carry out both the design and construction elements of the project with a similar result.

Considerations

It is important to implement the planning correctly. This means that appropriate contracts must be in place, the operation is carried out on sound business principles (actual supplies are made and it is not simply the moving of money).

Arrangements

In order to evidence the proper commerciality of the structure, it is important to bear in mind that:

• appropriate contracts are in place
• proper invoicing is required
• the arrangements are at arm’s length
• a profit for newco would emphasise the commercial aspect
• all parties’ accounts reflect the transactions
• newco combines all of its costs (including overheads/admin etc) and supplies them to the housebuilder as part of a single package of zero-rated design and build services
• newco acts as principal and not agent (that the professional services are not disbursements)
• the newco and the housebuilder are not in the same VAT group
• care should be taken if loans are required (they may compromise arm’s length and genuine commercial contentions)

HMRC’s view

In HMRC’s Internal Guidance Manual VCONST02720 it states that:

“Zero-rating the construction of buildings: services excluded from zero rating: design and build

Architectural or design services supplied as part of a design and build contract can be treated as part of the zero-rated supply of construction services.

A typical design and build contract will require the contractor to complete the design for the works and complete the construction of the works.

In such circumstances HM Revenue & Customs (HMRC) sees the design element as a cost component of the construction and not as a separate supply of architectural services which would be liable to VAT at the standard rate”.

Consequently, this planning is recognised and accepted by HMRC, however, it is important that it is applied effectively so it is difficult for HMRC to challenge.