Guidance

Buildings and construction (VAT Notice 708)

How to work out the VAT on building work and materials if you're a contractor, subcontractor or developer.

• From: HM Revenue & Customs
• Published: 13 August 2014
• Last updated: 24 January 2024 — See all updates

1. Overview

1.1 This notice

This notice explains:

• when building work can be zero-rated or reduced-rated at 5%
• when building materials can be zero-rated or reduced-rated at 5%
• when the sale, or long lease in a building is zero-rated
• where you can find out more about the VAT domestic reverse charge for building and construction services
• when developers are ‘blocked’ from deducting input tax on goods that are not building materials
• when a builder or developer needs to have a certificate from their customer, confirming that the building concerned is intended to be used for a purpose that attracts the zero or reduced rate
• when a customer can issue that certificate to a builder or developer
• what happens when a certificated building is no longer used for the purpose that attracted the zero rate, the use for that purpose decreases or the building is disposed of
• the special time of supply rules for builders
• when a business, on using its own labour to carry out building work on a building or civil engineering structure that it occupies or uses, must account for a self-supply charge

1.2 Who should read this notice

You should read this notice if you:

• are a contractor or subcontractor
• are a developer
• need to issue a certificate in order to obtain zero-rated or reduced-rated building work
• need to issue a certificate in order to buy, or long lease, a zero-rated building
• have issued the certificate and got zero rating but either no longer intend to use the building for a qualifying purpose, or dispose of the building

This notice may also help if you, as the customer or client of a contractor, subcontractor or developer, wish to satisfy yourself about the correct liability of the supplies of goods and services being made by them to you.

This is especially so in the case of DIY house builders and converters (‘self-builders’), who contract VAT-registered builders or tradesmen to carry out construction or conversion services and are charged VAT on those services.

Some, if not most, of the VAT charged can be recovered by the self-builder through the provisions of the DIY house builders and converters VAT refund scheme. However, only where that VAT refund scheme has been correctly charged in the first place.

You can read more about the VAT refund scheme in Reclaim VAT on a self build home.

1.3 The law

The Value Added Tax Act 1994, section 30 holds that goods and services specified in schedule 8 to the act are zero-rated.

Schedule 8, group 5 (as amended by Statutory Instruments 1995/280, 1997/50, 2001/2305, 2002/1101 and 2010/486) specifies when the construction (and the supply of building materials with those services), conversion of a non-residential building (and the supply of building materials with those services), sale, or long lease of a building is zero-rated.

Schedule 8, group 6 (as amended by Statutory Instruments 1995/283 and 1995/1625 (NI 9) and the Planning (Consequential Provisions) (Scotland) Act 1997) specifies when the alteration (and the supply of building materials with those services), sale, or long lease of a protected building is zero-rated.

The Value Added Tax Act 1994, section 29A (as inserted by the Finance Act 2001, section 99(4)) holds that goods and services specified in schedule 7A to the Act are reduced-rated.

Schedule 7A, group 6 (as inserted by Finance Act 2001, section 99(5) and amended by Statutory Instrument 2002/1100) specifies when a residential conversion is reduced-rated.

Schedule 7A, group 7 (as inserted by Finance Act 2001, section 99(5) and amended by Statutory Instruments 2002/1100 and 2007/3448) specifies when the renovation and alteration of a dwelling is reduced-rated.

Schedule 10, part 2 (as amended by Statutory Instruments 2002/1102 and 2011/86) specifies when a taxable self-supply arises, should the qualifying use of a certificated building cease or decrease or the building be disposed of.

The rules that ‘block’ developers from deducting input tax on goods that are not building materials are found in the VAT (Input Tax) Order 1992 (Statutory Instrument 1992/3222), articles 2 and 6 (as amended by Statutory Instrument 1995/281).

The special time of supply rules for builders are found in the Value Added Tax Regulations 1995 (Statutory Instrument 1995/2518), Regulations 89 and 93 (as amended by Statutory Instruments 1997/2887 and 1999/1374).

The rules for the self-supply of construction services are found in the Value Added Tax (Self-Supply of Construction Services) Order 1989 (Statutory Instrument 1989/472).

2. VAT liability

2.1 Construction services

The construction of a new building and work to an existing building is normally standard-rated. There are various exceptions to this.

Exceptions

The following are exceptions in the construction service:

• construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities ― rate of VAT 0% (read section 3)
• conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building ― rate of VAT 0% (read section 6)
• alterations to suit the condition of people with disabilities ― rate of VAT 0% (read Reliefs from VAT for disabled and older people (VAT Notice 701/7))
• first time gas and electricity connections ― rate of VAT 0% (read Fuel and power (VAT Notice 701/19))
• conversion (other than for housing associations) of a non-residential building into a qualifying dwelling or communal residential building and conversions of residential buildings to a different residential use ― rate of VAT 5% (read section 7)
• renovation or alteration of empty residential premises ― rate of VAT 5% (read section 8)
• installation of energy saving materials, grant funded heating system measures and qualifying security goods ― rate of VAT 5% (read Energy-saving materials and heating equipment (VAT Notice 708/6))
• installation of mobility aids for the elderly for use in domestic accommodation ― rate of VAT 5% (read Reduced rate VAT on mobility aids for older people)
• approved alterations to listed dwellings and communal residential buildings, and certain listed buildings used by charities (rate shown with effect from 1 October 2012) ― rate of VAT 20% (read section 9)
• development of residential caravan parks ― rate of VAT 20% (read section 20)

For exceptions in the construction service where home improvements on domestic property are situated in the Isle of Man, the rate of VAT is 5%. The Isle of Man VAT Notice for home improvements is available from:

Isle of Man Customs and Excise Advice Centre
Custom House
North Quay
Douglas
Isle of Man
IM99 1AG

Telephone: 01624 648130
Website: IoM Treasury

A combination of buildings may form a single dwelling, as long as they’re designed to function together for that purpose. For example, where you have 2 buildings, one building may comprise a lounge and kitchen, and the other comprises the bedrooms and bathroom. The buildings must be constructed or converted under a single project and single planning consent.

2.1.1 Retention payments

You apply the same VAT rate to retention payments as that applied to previous payments made under the contract. Further information about retention payments can be found in paragraph 23.1.2.

2.1.2 VAT domestic reverse charge

From 1 March 2021 VAT domestic reverse charge must be used for some supplies of building and construction services.

The reverse charge may apply to standard and reduced-rated services where:

• they are supplied by businesses who are registered for VAT in the UK
• they are supplied to businesses who are registered for VAT in the UK
• the payments are reported within the Construction Industry Scheme

To find out if the reverse charge applies to you read Check when you must use the VAT domestic reverse charge for building and construction services.

For more detailed information read the VAT reverse charge technical guide.

2.1.3 Subcontractors

Subcontractors are contractors who work to other contractors. For the most part they can zero rate or reduce rate their supplies according to the building being constructed or worked on, as described at paragraph 2.1.

The exceptions are:

• supplies in respect of certificated buildings (communal residential buildings or buildings used by charities) must always be standard-rated (read paragraph 15.8 and section 17 to find out about what is meant by a ‘certificated building’)
• supplies of disabled adaptations and mobility aids for over-60s (read Charity funded equipment for medical and veterinary uses (VAT Notice 701/6) and Reliefs from VAT for disabled and older people (VAT Notice 701/7))
• supplies made to a relevant housing association (read paragraph 6.2.3)
• supplies of renovation or alteration in connection with a single household dwelling that has been vacant for the past 2 years but is now being lived in (read paragraph 8.3.4)

2.2 Building materials

Retailers and builders merchants charge VAT at the standard rate on most items they sell.

Builders charge VAT on building materials that they supply and incorporate in a building (or its site) at the same rate as for their work. Therefore, if their work is zero-rated or reduced-rated, then so are the ‘building materials’. But some items are not building materials and remain standard-rated.

In this guidance you can find further information about supplies of building materials by contractors in section 11 and the VAT meaning of building materials.

2.3 The sale or lease of buildings by developers

The sale or lease of a building is zero-rated, standard-rated, exempt from VAT or outside the scope of VAT, depending on the circumstances.

This notice explains when the sale or lease of a building is zero-rated.

The first sale of, or long lease in a:

• new qualifying dwelling or communal residential building, or a new qualifying building used by a charity, by the person constructing it (read section 4)
• qualifying dwelling or communal residential building converted from a non-residential building, by the person converting it (read section 5)
• substantially reconstructed protected building by the person reconstructing it, subject to the changes implemented on 1 October 2012 (read section 10)

An explanation of when the sale or lease of a building is standard-rated or exempt from VAT can be found in Land and property (VAT Notice 742).

2.3.1 Input tax relating to exempt and taxable supplies

With the exception of certain specified costs (business entertainment, incorporated non-building materials, cars), you’re entitled to deduct input tax incurred on costs that you use or intend to use in making taxable supplies (including zero-rated supplies).

You cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies.

Further information is in Partial exemption (VAT Notice 706).

3. Zero rating the construction of new buildings

3.1 The conditions

3.1.1 Introduction

If you construct a new building, you will normally have to charge VAT at the standard rate. You may be able to zero rate your supply if you’re involved in constructing a qualifying building. A qualifying building can be a building:

• designed as a dwelling (read paragraph 14.2)
• that will be used solely for a relevant residential purpose’ (read paragraph 14.6)
• that will be used solely for a relevant charitable purpose (for non-business use or as a village hall read paragraph 14.7)

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your services.

If you supply and install goods with your services, you’ll also need to read sections 11 and 12 to determine the liability of those goods.

3.1.2 The basic conditions

Your services can be zero-rated when all of the following conditions are met:

1. A qualifying building has been, is being or will be constructed (read paragraph 3.2 and section 14).
2. Your services are made ‘in the course of the construction’ of that building (read paragraph 3.3).
3. Where necessary, you hold a valid certificate (read section 17).
4. Your services are not specifically excluded from zero rating (read paragraph 3.4).

For an explanation of when you may need to apportion your charges (read paragraph 3.5).

3.2 Construction of a qualifying building

3.2.1 Qualifying building

The following will help you decide if a qualifying building is being constructed.

The first type of qualifying building is constructed when:

• it’s built from scratch so before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained) ― read paragraph 3.2.3.
• one of the following also applies:
  • it is designed as a dwelling or number of dwellings (read paragraph 14.2)
  • it is intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6)
  • it is intended for use solely for a ‘relevant charitable purpose’ (read paragraph 14.7)

The second type of qualifying building is constructed when:

• the new building makes use of no more than a single facade (or a double facade on a corner site) of a pre-existing building
• the pre-existing building is demolished completely (other than the retained facade) before work on the new building is started
• the facade is retained as a condition or requirement of statutory planning consent or similar permission (read paragraph 3.2.3)
• one of the following also applies:
  • it is designed as a dwelling or number of dwellings (read paragraph 14.2)
  • it is intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6)
  • it is intended for use solely for a ‘relevant charitable purpose’ (read paragraph 14.7)

The third type of qualifying building is constructed when:

• a new building is constructed against an existing building so they share a wall
• there is no internal access between the buildings
• one of the following also applies:
  • it is designed as a dwelling or number of dwellings (read paragraph 14.2)
  • it is intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6)
  • it is intended for use solely for a ‘relevant charitable purpose’ (read paragraph 14.7)

The fourth type of qualifying building is constructed when all of the following apply:

• an existing building is enlarged or extended
• the enlargement or extension creates an additional dwelling or dwelling
• it is ‘designed as a dwelling or number of dwellings’ ― read paragraph 14.2

The fifth type of qualifying building is constructed when all of the following apply:

• an annexe to an existing building is built ― read paragraphs 3.2.5 to 3.2.9
• the annexe, or a part of it, is intended to be used solely for a ‘relevant charitable purpose’ ― read paragraph 14.

The sixth type of qualifying building is constructed when all of the following apply:

• a garage is built, or a building is converted into a garage
• the building is constructed or converted at the same time as, and intended to be occupied with a building ‘designed as a dwelling or number of dwellings’ ― read paragraph 14.2

The seventh type of qualifying building is constructed when all of the following apply:

• a building is built that is one of a number of buildings constructed at the same time on the same site ― read paragraph 3.2.2
• is intended to be used together with those other buildings as a unit solely for a ‘relevant residential purpose’ ― read paragraph 14.6

3.2.2 Examples of when a qualifying building is not constructed

Common examples of work you cannot zero rate include the construction of a:

• ‘granny’ annexe which cannot be used, or disposed of, separately from a main house, this is because the conditions of ‘a building designed as a dwelling’ have not been met in full ― read paragraph 14.2
• house which cannot be used, or disposed of, separately from a business premises, this is because the conditions of ‘a building designed as a dwelling’ have not been met in full ― read paragraph 14.2
• house that incorporates a part or parts of an earlier building on the site, for example, planning permission has been given to alter and extend an existing dwelling, that dwelling is substantially but not fully demolished in order to comply with the planning permission and a new dwelling constructed, incorporating the parts not demolished
• detached enclosed swimming pool in the grounds of a new house, this is because the building being constructed is not ‘a building designed as a dwelling’ ― read paragraph 14.2
• detached building in the grounds of an existing care home which extends the facilities of the home, such as an accommodation or administration block or ‘extra care’ units, this is because the building being constructed will not be used for a relevant residential purpose in its own right and it was not constructed at the same time as the rest of the home ― read paragraph 14.6

3.2.3 Demolition and retention of party walls

In determining whether a building has been demolished completely to ground level, you can ignore the retention of party walls that separate one building from another building that is not being demolished.

So, for example, you’re ‘constructing a building’ when you ‘infill’ in a row of terraced houses provided the pre-existing house is demolished completely to ground level apart from the party walls shared with the adjoining houses either side.

But if you’re re-developing adjoining houses in a terrace, the party wall between the houses being redeveloped will also need to be demolished before you’re seen to be ‘constructing a building’ for VAT purposes.

A party wall need not separate a building from another building, a party wall can also be the wall of a building. On one property and a boundary or garden wall for the adjoining property. If such a wall is retained, the building in question cannot be said to have been demolished completely to ground level.

3.2.4 Evidence required for retention of facades

In order for zero rating to apply, a facade (or 2 facades in the case of a corner site) must be retained as a condition or requirement of a statutory planning consent or similar permission.

Planners may include this requirement as a condition within their planning consent letter. HMRC will also accept evidence that the planning authorities have seen an application with plans showing that a facade is to be retained and that approval has been granted for construction to proceed on that basis.

Once planning approval has been granted the construction must proceed in accordance with the submitted plans and from that point, they become the ‘condition or requirement’.

3.2.5 Enlargements and extensions that create additional dwellings

You can zero rate the enlargement of, or extension to, an existing building to the extent that the extension or enlargement contains an additional dwelling provided both the following conditions are met, the:

• new dwelling is wholly within the enlargement or extension
• dwelling is ‘designed as a dwelling’ ― read paragraph 14.2

So, for example, a new eligible flat built on top of an existing building can be zero-rated.

If the new dwelling is partly or wholly contained within the existing building, you cannot zero rate your work under the rules in this section. You may be able to reduce rate your charge as a ‘changed number of dwellings conversion’ ― the rules are explained in section 7. The sale or long lease of the new dwelling could be zero-rated as a converted non-residential building. The rules are explained in section 5.

3.2.6 Relevant charitable purpose annexes

The construction of a building intended for use solely for a relevant charitable purpose is zero-rated, with additions to an existing building normally being standard-rated. But the addition (or where only part of the addition is being used solely for a relevant charitable purpose, that part) can be zero-rated when all the following conditions are met:

1. An ‘annexe’ is constructed, rather than an ‘extension’ or ‘enlargement’ (read paragraph 3.2.7).
2. The annexe (or a part of it) is intended for use solely for a ‘relevant charitable purpose’ (read paragraph 3.2.8).
3. The annexe is capable of functioning independently from the existing building (read paragraph 3.2.8).
4. The annexe and the existing building each has its own independent main access (read paragraph 3.2.9).
5. Conditions 2 to 4 of paragraph 3.1.2 are met.

The demolition and reconstruction of an annexe to an existing building can be zero-rated subject to the conditions being met.

The demolition and reconstruction of part of an existing building, such as the wing of a building, or the conversion of an existing building (or part) to an annexe cannot be zero-rated as the construction of an annexe.

3.2.7 Definition of an ‘annexe’

An annexe can be either a structure attached to an existing building, or a structure detached from it. A detached structure is treated for VAT purposes as a separate building. The comments in this section only apply to attached structures.

There is no legal definition of ‘annexe’. In order to be considered an annexe, a structure must be attached to an existing building but not in such a way so as to be considered an enlargement or extension of that building.

An enlargement or extension would involve making the building bigger so as to provide extra space for the activities already carried out in the existing building. Examples of an enlargement or extension are a classroom, or a sports hall added to an existing school building, or an additional function room (or kitchen or toilet block) added to an existing village hall.

On the other hand, an annexe would provide extra space for activities distinct from but associated with the activities carried out in the existing building. The annexe and the existing building would form 2 separate parts of a single building that operate independently of each other.

Examples of an annexe are a day hospice added to an existing residential hospice, a self-contained suite of rooms added to an existing village hall, a church hall added to an existing church, or a nursery added to a school building.

3.2.8 Relevant charitable use and part qualifying annexes

When determining the second condition at paragraph 3.2.5, the annexe need not be an annexe to a building used solely for a relevant charitable purpose. What’s important is that the annexe itself is intended for use solely for a relevant charitable purpose. For an explanation of what relevant charitable purpose means (read paragraph 14.7).

Where only a part of the annexe is intended for use solely for a relevant charitable purpose, you can only zero rate your supply to the extent that it relates to that part. The apportionment rules in section 16 apply in the same way to the construction of relevant charitable annexes as they do to the construction of buildings.

3.2.9 When an annexe is capable of functioning independently

For zero rating to apply the whole annexe must be capable of functioning independently from the existing building, even if only part of it is intended to be used solely for a relevant charitable purpose.

An annexe is capable of functioning independently when the activities in the annexe can be carried on without reliance on the existing building. You can ignore the existence of building services (electricity and water supplies) that are shared with the existing building.

3.2.10 Access conditions for annexes

The fourth condition at paragraph 3.2.5 is that the annexe and the existing building must each have its own independent main access. So, even if the annexe has its own entrance the:

• main access to the annexe must not be through the existing building
• annexe must not create the main access to the existing building

3.3 Services made ‘in the course of the construction’ of the building

3.3.1 Meaning of these services

Your services are supplied ‘in the course of the construction’ when you carry out:

• work on the building itself (including applying any usual decorative features) prior to completion of the building (read paragraph 3.3.2 and paragraph 3.3.3)
• any other service closely connected to the construction of the building (read paragraphs 3.3.4 to 3.3.7)

3.3.2 When construction is complete

Completion takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

• when a Certificate of Completion is issued
• the accordance to approved plans and specifications
• the scope of the planning consent and variations to it
• whether the building is habitable or fit for purpose

Once construction is ‘complete’, any further supplies of construction services (other than those mentioned at paragraph 3.3.6 are no longer ‘in the course of construction’ and are thus ineligible for the zero rate.

Example 1

A developer is in the process of constructing a house for sale. The house buyer would like the house to include an attached conservatory and so contracts with a conservatory specialist to supply and install the conservatory prior to them moving in.

The developer refuses the conservatory supplier access to the site until after they have finished their work and the house has been conveyed to the house buyer.

In such circumstances, the supply by the conservatory supplier is not work ‘in the course of the construction’ of the house but work to an existing building and cannot be zero-rated.

Example 2

A developer constructs and sells ‘shell’ loft apartments for fitting out by the homebuyer. When the developer sells the lofts, their construction would not be ‘complete’. Future work to fit them out can be zero-rated until such time as they’re habitable.

Example 3

A non-fee paying school obtains planning permission to construct a building that will be used solely for a relevant charitable purpose. But due to limited funds, the extent of the work is scaled down and a smaller building is constructed instead.

Funds are later obtained to extend and enlarge the building to produce a building of the same capacity as originally planned.

In such circumstances, the building would be ‘complete’ at the end of the first set of works and the later works are standard-rated.

You may also need to bear in mind, the length of the interval between construction phases, the reason for the interval and the nature of the construction works in the second phase.

3.3.3 Snagging

Snagging (or the correction of faults) is often carried out after the building has been ‘completed’. The work forms part of a zero-rated building contract, provided you carried out the initial building work and the snagging forms part of that building contract.

If you’re carrying out the work as a separate supply (you may, for example, be contracted to correct faults where the original work was carried out by another person) and it is performed after the building has been completed, then the work is to an existing building and cannot be zero-rated under the rules in this section.

3.3.4 Work closely connected to the construction of the building

Subject to paragraph 3.3.6, your work is closely connected to the construction of the building when it either:

(a) allows the construction of the building to take place, such as when you:

• demolish existing buildings and structures as part of a single project to construct a new building or buildings in their place (the granting of a right to remove materials is not the supply of demolition services and is standard-rated)
• provide or improve an access point to a building site to allow deliveries to be made
• carry out ground works (including the levelling and drainage of land) as part of the process of constructing a new building or buildings in its place
• provide site clearance or ‘builders’ clean’ services
• secure the site

(b) produces works that allow the building to be used, such as works in connection with the:

• means of providing water and power to the building (this can extend to the work required to make the connection to the nearest existing supply)
• means of providing within the development site access to the building (for example roads, footpaths, parking areas, drives and patios)
• means of providing security (for example walls, fences and gates but most electrical appliances are always standard-rated, further information is in paragraph 13.60
• provision of soft landscaping within the site of a building (such as the application of topsoil, seeding with grass or laying turf)

The planting of shrubs, trees and flowers would not normally be seen as being ‘closely connected…’ except to the extent that it’s detailed on a landscaping scheme approved by a planning authority under the terms of a planning consent condition. This does not include the replacement of trees and shrubs that die, or become damaged or diseased.

It’s not possible to produce an exhaustive list of services that are closely connected to the construction of the building, and each case not included in (a) and (b) must be looked at on its own merits.

You need not be the main contractor in order for your supplies to be considered to be ‘works closely connected…’. You can be a subcontractor or another contractor.

3.3.5 Work unconnected to the construction of a building

Examples of work that are unconnected to the construction of a building include:

• the provision of on-site catering
• the cleaning of site offices
• landscaping (other than the landscaping described in paragraph 3.3.4
• the provision of outdoor leisure facilities for a dwelling such as tennis courts and swimming pools (although the provision of a playground at a school would qualify as it is needed for the school to be used)
• works outside the site of the building (other than those described in paragraph 3.3.4), including where that work is carried out under a ‘planning gain’ agreement with a planning authority

Further information on planning gain agreements can be found in Land and property (VAT Notice 742).

3.3.6 Services carried out before or after the construction of the building

If you carry out services either before or after the physical construction of the building takes place, they can only be seen as closely connected if there’s a close connection between when they’re performed and when the physical construction of the building takes place.

Services described in paragraph 3.3.4 may be zero-rated (subject to the conditions in paragraph 3.1.2) where, for example:

• civil engineering services are supplied to a landowner for the purposes of servicing a building plot and it’s clear that the construction of a building that qualifies for the zero rate will take place shortly afterwards
• soft landscaping work is carried out after the building has been completed, where those works have been delayed due to adverse weather conditions

Services in paragraph 3.3.4 are standard-rated where for example:

• site investigation or demolition work is carried out before planning permission for the construction of a building that qualifies for the zero rate has been granted
• the services for a building (water, electricity) are installed on land which is to be sold as building land and where it’s not clear that the construction of a building that qualifies for the zero rate will take place shortly afterwards
• the work is delayed until after the building is complete owing to an insufficiency of funds

3.3.7 Connecting utilities to existing buildings

The connection of utilities to an existing building is normally standard-rated. But in some cases, the first time connection of gas or electricity may be reduce-rated.

Further information can be found in Fuel and power (VAT Notice 701/19).

3.4 Services excluded from zero rating

3.4.1 Architects, surveyors, consultants and supervisors

The supply of architectural, surveying, consultancy and supervisory services is always standard-rated. These services are obtained in a number of ways.

Design and build

The building client engages a contractor to carry out both the design and construction elements of the project.

Where it’s clear in the contract that any services of architects, surveyors or others acting as a consultant or in a supervisory capacity are no more than cost components of the contractors supply and are not specifically supplied on to the customer, then the whole supply can be treated as being eligible for the zero rate.

Project or construction management

The building client engages an external consultant to plan, manage and co-ordinate the whole project including establishing competitive bids for all elements of the work, with the successful contractors being employed directly by the building client.

Management fees paid by the building client to the consultants are standard-rated.

Management contracting

This system can take various forms. Normally the building client first appoints a professional design team and engages a management contractor to advise them. If the project goes ahead, the management contractor will act as the main contractor for the work (engaging ‘works contractors’ to carry out work to them as necessary).

Their preliminary advisory services are then treated in the same way as their main construction services. If the project does not go ahead, their preliminary advisory services are standard-rated.

3.4.2 Goods on hire

Goods hired on their own are always standard-rated. Examples include the hire of:

• plant and machinery (although plant hired with an operator can be zero-rated where all the conditions in paragraph 3.1.2 are met)
• scaffolding, formwork or false work (although the service of erecting or dismantling can be zero-rated where all the conditions in paragraph 3.1.2 are met)
• security fencing
• mobile offices

3.4.3 Goods put to a temporary private use

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services ― read VAT guide (VAT Notice 700) for more information. Such supplies are not zero-rated under the rules in this section.

3.5 Apportionment

3.5.1 Apportionment for qualifying parts of buildings

If you construct a building that is only in part a zero-rated building (read paragraph 3.2), you can only zero rate your work to the qualifying parts. For example, if you construct a building containing a shop with a flat above, then only the construction of the flat can be zero-rated. This is explained further at section 16.

3.5.2 Apportionment for mixed site developments

Where a service is supplied in part in relation to the construction of a zero-rated building and in part for other purposes, a fair and reasonable apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

Example

A road is built through a development site where both zero-rated and standard-rated buildings are being constructed. The road serves all the buildings and so the work is carried out, in part, in relation to the construction of the zero-rated buildings and, in part, in relation to the construction of the standard-rated buildings.

The liability of installing the road may be apportioned on a fair and reasonable basis, to reflect the buildings being served.

If you decide not to make an apportionment then none of your work can be zero-rated.

4. Zero rating the sale of, or long lease in, new buildings

4.1 The conditions

4.1.1 Introduction

The sale of, or lease in, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT depending on the circumstances. If you have constructed a ‘qualifying’ building, that is a building:

• ‘designed as a dwelling’ (read paragraph 14.2)
• that will be used solely for a ‘relevant residential purpose’ (read paragraph 14.6)
• that will be used solely for a ‘relevant charitable purpose’ (that is for a charity’s non-business use or as a village hall ― read paragraph 14.7)

You may be able to zero rate your first sale of, or long lease in, the property. The remainder of this section explains the detailed conditions that need to be met before you can zero rate your supply.

For an explanation of when a developer cannot recover input tax on goods incorporated in a zero-rated building read section 12.

If you cannot zero rate your supply you should read Land and property (VAT Notice 742) to determine if your supply is standard-rated or exempt.

Remember, you cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable (including zero-rated) and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies.

Further information can be found in Partial exemption (VAT Notice 706).

4.1.2 The basic conditions

Your supply can be zero-rated when all of the following conditions are met:

1. You grant a major interest in, or in any part of, a building, dwelling or its site (read paragraph 4.2).
2. If a tenancy or lease, the payment is the premium, or if no premium is due, is the first payment of rent (read paragraph 4.3).
3. A qualifying building has been, or is being, constructed (read paragraph 3.2 and 4.7).
4. The building is not a holiday home (read paragraph 4.4).
5. You have ‘person constructing’ status (read paragraph 4.5).
6. The grant of a major interest is your first grant (read paragraph 4.6).
7. Where necessary, you hold a valid certificate (read section 17).

For an explanation of when you may need to apportion your charges read paragraph 4.8.

4.2 Granting a major interest in a building

You’re granting a major interest in a building when you sell, assign or surrender:

• the freehold
• in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
• in relation to Scotland, the estate or interest of the owner
• in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years

4.2.1 Short leases and partial exemption

If you intend to make a zero-rated grant of a major interest in a building (thereby recovering input tax on costs related to the construction and intended sale) but make a short lease in it (say due to a downturn in the property market) before making the zero-rated supply, you may need to make an adjustment to any input tax you have claimed.

The amount of adjustment will depend on your future intentions.

Further information on input tax and partial exemption can be found in Partial exemption (VAT Notice 706).

4.3 Premiums and rental payments

Where a grant of a major interest is either a long lease or a tenancy agreement, zero rating is restricted to the premium or the first rental payment made in respect of that grant. Subsequent payments are exempt.

The effect of this is that a developer is able to treat as input tax attributable to a taxable supply, the VAT incurred on construction and selling costs. The VAT incurred on ongoing maintenance costs is attributable to the exempt supplies.

Further information on input tax and partial exemption can be found in Partial exemption (VAT Notice 706).

4.3.1 Shared ownership schemes

Shared ownership arrangements involve the sharing of equity in a dwelling between, typically, an occupier and a housing association. The occupier purchases a dwelling at a proportion of its value and then pays rent to cover the share in the retained equity.

Occupiers have the option of increasing their share of the equity by making additional payments, acquiring a further share related to the current value of the property (‘staircasing’). The rent is then reduced accordingly.

The initial payment by the occupier for their share of the equity can be zero-rated.

The subsequent rental payments and any additional ‘staircase’ payments are not zero-rated but exempt.

The effect of this is that a developer is able to treat as input tax attributable to a taxable supply, the VAT incurred on construction and selling costs. The VAT incurred on ongoing maintenance costs is attributable to the exempt supplies. Any VAT incurred on the costs of staircasing agreements is also attributable to exempt supplies.

Further information on input tax and partial exemption can be found in Partial exemption (VAT Notice 706).

4.4 Holiday homes

4.4.1 Definition of a ‘holiday home’

For the purposes of the zero rate for grants of major interests, a ‘holiday home’ is a ‘building designed as a dwelling or number of dwellings’ where the person buying or leasing the property is:

• not entitled to reside in the accommodation throughout the year (such as in time share accommodation)
• prevented from residing in the accommodation throughout the year by the terms of a covenant, statutory planning consent or similar permission
• prevented from using the accommodation as their principal private residence by the terms of a covenant, statutory planning consent or similar permission

4.4.2 Tax treatment

The sale or long lease of a ‘holiday home’ cannot be zero-rated.

If the building is less than 3 years old when the sale or long lease takes place, the supply is standard-rated.

If the building is 3 years old or more, the supply is exempt but where a long lease is involved, the lease is only exempt to the extent that the consideration is in the form of a premium. Any subsequent payments for a lease, such as ground rents and service charges, are standard-rated.

Further information can be found in Hotels and holiday accommodation (VAT Notice 709/3).

Building work in the course of the construction of a ‘holiday home’ that is ‘designed as a dwelling’ is zero-rated when the conditions at paragraph 3.1.2 are met.

4.5 Having ‘person constructing’ status

4.5.1 The meaning of ‘person constructing’

You’re a ‘person constructing’ a building if, in relation to that building, you’re acting as, or you have, at any point in the past, acted as a:

• developer ― you physically constructed, or commissioned another person to physically construct, the building (in whole or in part) on land that you own or have an interest in
• contractor or subcontractor ― you provided construction services to the developer or another contractor for the construction of the building, subcontracting work as necessary

4.5.2 Multiple people having ‘person constructing’ status

Multiple people can have ‘person construction’ status, but ‘person constructing’ status is not transferred when you transfer property. Instead each person must meet the conditions at paragraph 4.5.1.

An example is where a developer takes over and finishes a partly completed building. Both the first and second developers have ‘person constructing’ status because they have both been involved in physically constructing the building.

For an explanation of when the sale of a partly constructed building is zero-rated, read paragraph 4.7.4.

4.5.3 Transferring the ‘person constructing’ status

You can inherit ‘person constructing status’ when you acquire a new, completed residential or charitable development as part of a transfer of a going concern (TOGC) (read paragraph 4.5.6).

4.5.4 Supplies by members of VAT groups

For VAT purposes, any business carried on by a member of a VAT group is treated as carried on by the representative member. But when determining whether a supply can be zero-rated, ‘person constructing’ status is only considered from the perspective of the group member who, in reality, makes the supply. This need not be the representative member.

For example a VAT group includes a:

• holding company as the representative member and a development company as a member, the development company constructs and sells houses to the public, it has ‘person constructing’ status and so the sales can be zero-rated
• development company as representative member and an investment company as a member, the development company constructs a block of flats and sells it to the investment company, who in turn leases the flats to the public on long leases, the investment company does not have ‘person constructing’ status, even though the representative member has ‘person constructing’ status the leases cannot be zero-rated and are exempt

4.5.5 Beneficial interests

Sometimes the beneficial owner of a property must register for VAT instead of the legal owner ― further information can be found in Land and property (VAT Notice 742). In such circumstances the beneficial owner must have ‘person constructing’ status before the sale or long lease of the property can be zero-rated.

4.5.6 Transfer of a going concern of new developments of dwellings, relevant residential or relevant charitable buildings

A person acquiring a completed residential or charitable development as part of a transfer of a going concern inherits ‘person constructing’ status, and is capable of making a zero-rated first major interest grant in that building or part of it as long as:

a) a zero-rated grant has not already been made of the completed building or relevant part by a previous owner (not including the grant that gives rise to the transfer of a going concern)

b) the person acquiring the building as a transfer of a going concern would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business ― this entails the transfer (as a transfer of a going concern) of its entire property portfolio of newly constructed residential or charitable buildings to an associated company, which will make first major interest grants ― if these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the capital goods scheme or partial exemption ‘clawback’ provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances ― we would consider this to be an unfair disadvantage)

c) that person would not obtain an unfair VAT advantage by being in a position to make zero-rated supplies (for example, by recovering input tax on a refurbishment of an existing building)

4.6 First grant of a major interest

4.6.1 The first sale or long lease

Subject to the conditions at paragraph 4.1.2, you can only zero rate your first sale of, or long lease (read paragraph 4.2) in, a building (or part of a building). Zero rating is not affected by:

• the length of time between completion of construction and your sale of, or long lease in, the building
• any sale of, or long lease in, the site before the building was constructed
• any sale of, or long lease in, the building made by other people (even if they also have ‘person constructing’ status or have made their own zero-rated supply in the building)
• any short leases that may have been made (if you make short leases, you should also read paragraph 4.2.1)
• any sales of, or long leases in, other parts of the building that you may have made ― for example, if you’re the developer of a block of flats you can zero rate your first long lease in each flat

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT. For further information read Land and property (VAT Notice 742).

4.6.2 Supplies within VAT groups

The grant of a major interest between 2 members of the same VAT group is ignored for VAT purposes. It’s the first grant of a major interest to a person outside of the group that is the first grant for the purposes of zero rating.

The member of the group actually making that grant must have ‘person constructing’ status (read paragraph 4.5.4). Under VAT grouping rules all supplies are considered to be made by the representative member, but this will not prevent zero rating from applying if the member that would make the supply but for this rule has ‘person constructing’ status.

4.7 How to treat land, garages and partly-constructed buildings

4.7.1 How much land you can zero rate

If you’re making a zero-rated sale of, or long lease in, a building or dwelling you can normally zero rate with the sale or long lease:

• the land on which the building stands (the ‘foot print’)
• a reasonable plot of land surrounding it (this will depend on the size, nature and situation of the building and the nature of the surrounding land, for example, a garden would be acceptable but not a field or paddock)
• the right to park a vehicle, so long as the parking place is close by and is intended to be used in conjunction with the building or dwelling

Further information on grants of parking facilities with dwellings can be found in Land and property (VAT Notice 742).

4.7.2 Building land

The sale of bare building land is not zero-rated and would be exempt from VAT, unless an option to tax has been taken out.

If the land contains civil engineering works (roads, water and electricity supplies) but no building is yet under construction, the sale would also be exempt from VAT unless an option to tax has been taken out.

Further information on the option to tax can be found in Opting to tax land and buildings (VAT Notice 742A).

If you sell land to someone and, at the same time, enter into a separate construction contract with them to build on what will be their land, you’re making 2 supplies and the VAT liability of each supply should be considered independently. The VAT liability of constructing new buildings is explained in section 3.

4.7.3 Garages

You can also zero rate along with the zero-rated sale or long lease of a building designed as a dwelling or number of dwellings, a new garage or a garage resulting from the conversion of a non-residential building provided that the garage:

• came about at the same time as the building ‘designed as a dwelling or number of dwellings’ was being constructed
• intended to be occupied with the dwelling or one of the dwellings

4.7.4 Partly constructed buildings

Subject to the conditions at paragraph 4.1.2 you can zero rate the sale of, or long lease in, land that will form the site of a building provided a building is clearly under construction.

If you sell or long lease a plot where a building is clearly not under construction, your supply is not zero-rated and you should follow the guidance at paragraph 4.7.2.

4.8 Apportionment

4.8.1 Apportionment for qualifying parts of buildings

If you sell or long lease a building (or part of a building) that’s only in part a zero-rated building, then you must apportion your supply. This is explained further at section 16.

4.8.2 Apportionment for mixed sites

If you sell or long lease qualifying buildings along with non-qualifying buildings or land that does not form part of the site of the qualifying buildings (read paragraph 4.6.1), you must apportion your supply between them on a fair and reasonable basis.

Example 1

You own building land and commence constructing qualifying houses on identifiable plots. You then sell the whole site. The sale of the houses and their plots will be zero-rated but not the remaining building land or the infrastructure (roads, footpaths) leading to the house plots. The sale in that part of the development will be exempt, subject to any option to tax being taken out.

Example 2

If you’re selling to another developer who will continue with the development, the sale may be outside the scope of VAT as the transfer of a going concern. Further information can be found in Transfer a business as a going concern (VAT Notice 700/9).

Example 3

You own building land and develop a number of commercial buildings on it. You sell the freehold of the developed site to a charity, but they can only certify that one of the buildings will be used solely for a relevant charitable purpose. Only the part of the sale attributable to that building and its site, can be zero-rated. The part of the sale attributable to the other buildings will be standard-rated if the buildings are less than 3 years old or exempt if the buildings are older, subject to any option to tax.

Further information on the treatment of buildings that do not qualify for the zero rate and the option to tax can be found in Land and property (VAT Notice 742) and Opting to tax land and buildings (VAT Notice 742A).

5. Zero rating the sale of, or long lease in, non-residential buildings converted to residential use

5.1 The conditions

5.1.1 Introduction

The sale of, or lease in, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT depending on the circumstances. If you convert a non-residential building into a:

• new eligible dwelling (referred to as a building ‘designed as a dwelling’ and explained at paragraph 14.2)
• building that will be used solely for a ‘relevant residential purpose’ (read paragraph 14.6)

You may be able to zero rate your first sale of, or long lease in, the converted property. Non-residential buildings include residential buildings that have not been lived in for at least 10 years.

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your supply.

For an explanation of when a developer cannot recover input tax on goods incorporated in a zero-rated building read section 12.

If you cannot zero rate your supply, you should read Land and property (VAT Notice 742) to determine if your supply is standard-rated or exempt. You cannot normally deduct input tax incurred on costs that relate to your exempt supplies.

If your input tax relates to both taxable (including zero-rated) and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. Further information can be found in Partial exemption (VAT Notice 706).

5.1.2 The basic conditions

Your supply can be zero-rated when all of the following conditions are met:

1. You grant a major interest in a building.
2. The building is the subject of a ‘non-residential conversion’ (read paragraph 5.3).
3. The building is not converted into a holiday home (read paragraph 5.4).
4. You have ‘person converting’ status (read paragraph 5.5).
5. The grant of a major interest is your first grant (read paragraph 5.6.1).
6. Where necessary, you hold a valid certificate (read section 17).

For an explanation of when you may need to apportion up your charges read paragraph 5.8.

5.2 Granting a major interest in the building

You’re granting a major interest in a building when you sell, assign or surrender:

• the freehold
• in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
• in relation to Scotland, the estate or interest of the owner
• in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years

5.3 Non-residential conversion

A ‘non-residential conversion’ takes place in 2 situations. The first is when the building (or part) being converted has never been used as a dwelling or number of dwellings (read paragraph 5.3.1) for a ‘relevant residential purpose’ (read paragraph 14.6), and it is converted into a building ‘designed as a dwelling or number of dwellings’ (read paragraph 14.2), or intended for use solely for a ‘relevant residential purpose (read paragraph 14.6).

The second situation requires that in the 10 years immediately before (read paragraph 5.3.2) the sale or long lease, the building (or part) has not been used as a dwelling or number of dwellings or for a ‘relevant residential purpose’ and it is converted into a building either ‘designed as a dwelling or number of dwellings’ (read paragraph 14.2), or intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6).

Examples of a ‘non-residential conversion’ into a building ‘designed as a dwelling or number of dwellings’ include the conversion of:

• a commercial building (such as an office, warehouse, shop)
• an agricultural building (such as a barn)
• a redundant school or church

The conversion of a garage, occupied together with a dwelling, into a building designed as a dwelling is not a non-residential conversion.

The term ‘garage’ not only covers buildings designed to store motor vehicles but also buildings such as barns, to the extent that they’re used as garages.

But if it can be established that the garage was never used to store motor vehicles or has not been used as a garage for a considerable length of time prior to conversion, its conversion into a building designed as a dwelling can be a non-residential conversion.

5.3.1 The meaning of ‘use as a dwelling’

A building is ‘used as a dwelling’ when it has been designed or adapted for use as someone’s home and is so used. The living accommodation need not have been self-contained or to modern standards. So, buildings that have been ‘used as a dwelling’, include:

• public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self-contained ― normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas
• bedsit accommodation
• crofts

If you convert these types of property into a building ‘designed as a dwelling or number of dwellings’, or intended for use solely for a ‘relevant residential purpose’, then, unless the 10-year rule applies, your sale of, or long lease in, the property cannot be zero-rated and is exempt from VAT.

5.3.2 The 10-year rule

You cannot normally zero rate the sale of, or long lease in, a building that has previously been lived in. Subject to the conditions at paragraph 5.1.2, the exception to this is where, in the 10 years immediately before you make your sale or long lease, it has not been lived in and following the work it is ‘designed as a dwelling’ or intended for use solely for a ‘relevant residential purpose’.

If you start work to convert the property into an eligible dwelling or residential building before the 10 year point is reached, you can recover associated VAT costs as input tax provided that you intend to sell or make a long lease in it on or after the 10-year point has been reached. If you change your intention, you may have to repay any input tax that has been claimed. Further information can be found in Partial exemption (VAT Notice 706).

5.3.3 Proof required that the building has been empty for 10 years

You may be required to show that the building has not been lived in during the 10 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.

If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 10 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in he should write with their best estimate. We may then call for other supporting evidence.

5.3.4 Establish when a dwelling was last lived in

When considering when a dwelling was last lived in, you can ignore any:

• illegal occupation by squatters
• occupation by ‘guardians’
• use that is not residential in nature, such as storage for a business

A ‘guardian’ is a person who is installed in a property by the owner or on behalf of the owner in order to deter squatters and vandals. They may pay a low rent on terms that fall short of a formal tenancy. Alternatively, they may be paid to occupy the property.

A ‘guardian’ is to be distinguished from a caretaker or housekeeper who lives permanently in the property. Property occupied by a caretaker or housekeeper is likely to be furnished throughout.

If the dwelling has been lived in on an occasional basis (for example, because it was a second home) in the 10 years immediately before you sell or long lease the property, you cannot zero rate your supply.

5.3.5 Merging non-residential parts of a building with other parts

To qualify for zero rating the conversion must only use non-residential parts of the building.

For example, you convert a 2-storey public house containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ ― read paragraph 5.3.1) into 2 flats, 1 being created out of the bar areas and 1 being created out of the private living area. The onward sale or long lease of the former is zero-rated but that of the latter will be exempt.

The onward sale or long lease of the house or houses cannot be zero-rated and is exempt when the conversion uses a mixture of non-residential parts of the building and other parts. This would include where you convert the same property into either:

• into a single house
• a pair of semi-detached houses by splitting it vertically, each of which uses part of what was the living accommodation

5.4 Building becoming a holiday home

5.4.1 Definition of a ‘holiday home’

For the purposes of the zero rate on grants of major interests, a ‘holiday home’ is a ‘building designed as a dwelling or number of dwellings’ where the person buying or leasing the property is:

• not entitled to reside in the accommodation throughout the year (such as in time share accommodation)
• prevented from residing in the accommodation throughout the year by the terms of a covenant, statutory planning consent or similar permission
• prevented from using the accommodation as their principal private residence by the terms of a covenant, statutory planning consent or similar permission

5.4.2 The tax treatment

The sale or long lease of a ‘holiday home’ cannot be zero-rated.

If, after conversion, the building is less than 3 years old when the sale or long lease is made, the sale or long lease is standard-rated. If the building is 3 years old or more, the sale or long lease is exempt. The long lease is exempt to the extent that the consideration is in the form of a premium.

Any subsequent payments for a lease, such as ground rents and service charges, are standard-rated.

Further information can be found in Hotels and holiday accommodation (VAT Notice 709/3).

5.5 Having ‘person converting’ status

5.5.1 The meaning of ‘person converting’

You’re a ‘person converting’ a building if, in relation to that building, you’re acting as, or have, at any point in the past, acted as a developer, contractor or subcontractor.

Developer

You physically converted, or commissioned another person to physically convert, a building (in whole or in part) that you own or have an interest in

Contractor or subcontractor

You provided construction services to the developer or another contractor for the conversion of the building, subcontracting work as necessary

5.5.2 More than one person having ‘person converting’ status

More than one person can have ‘person converting’ status, but this status is not transferred when you transfer property. Instead, each person must meet the conditions at paragraph 5.5.1.

An example is where a developer takes over and finishes a partly converted building. The first and second developers both have ‘person converting’ status because they have both been involved in physically converting the building.

For an explanation of when the sale of a partly converted building is zero-rated read paragraph 5.7.3.

5.5.3 Transferring the ‘person converting’ status

The ‘person converting’ status can only be transferred when you have inherited this when you acquired a converted residential development as part of a transfer of a going concern (read paragraph 5.5.6).

5.5.4 Supplies by members of VAT groups

For VAT purposes, any business carried on by a member of a VAT group is treated as carried on by the representative member, but when determining whether a supply can be zero-rated, ‘person converting’ status is only considered from the perspective of the group member who, in reality, makes the supply. This need not be the representative member.

For example, a VAT group includes a:

• holding company as the representative member and a development company as a member, the development company converts non-residential property into flats and sells those flats to the public, the development company has ‘person converting’ status and so the sales can be zero-rated
• development company as representative member and an investment company as a member, the development company converts an office block into a block of flats and sells it to the investment company, who in turn leases the flats to the public on long leases, the investment company does not have ‘person converting’ status, even though the representative member has ‘person converting’ status the leases cannot be zero-rated and are exempt

5.5.5 Beneficial interests

Sometimes the beneficial owner of a property must register for VAT instead of the legal owner, further information can be found in Land and property (VAT Notice 742). In such circumstances the beneficial owner must have ‘person converting’ status before the sale or long lease of the property can be zero-rated.

5.5.6 Transfer of a going concern of converted developments of dwellings, relevant residential buildings

A person acquiring a residential development that has been subject to a qualifying conversion as part of a transfer of a going concern inherits ‘person converting’ status and is capable of making a zero-rated first major interest grant in that building or part of it as long as:

a) a zero-rated grant has not already been made of the converted building or relevant part by a previous owner (not including the grant that gives rise to the transfer of a going concern)

b) the person acquiring the building as a transfer of a going concern would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business ― this entails the transfer (as a transfer of a going concern) of its entire property portfolio of newly constructed or converted qualifying buildings to an associated company, which will make first major interest grant ― if these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the capital goods scheme or partial exemption ‘claw back’ provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances ― we would consider this to be an unfair disadvantage)

c) that person would not obtain an unfair VAT advantage by being in a position to make zero-rated supplies (for example, by recovering input tax on a refurbishment of an existing building)

5.6 First grant of a major interest

5.6.1 First sale or long lease

Depending on the conditions at paragraph 5.1.2, you can only zero rate your first sale of, or long lease (read paragraph 4.2) in, a building (or part of a building). Zero rating is not affected by:

• the length of time between completion of the conversion and your sale of, or long lease in, the building
• any sale of, or long lease in, the building before it was converted
• any sale of, or long lease in, the building made by other people (even if they also have ‘person converting’ status or have made their own zero-rated supply in the building)
• any short leases that may have been made (if you make short leases, you should also read paragraph 4.2.1)
• any sales of, or long leases in, other parts of the building that you may have made ― for example, if you convert a non-residential building into flats you can zero rate your first long lease in each flat

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT ― for further information read Land and property (VAT Notice 742).

5.6.2 Supplies within VAT groups

The grant of a major interest between 2 members of the same VAT group is ignored for VAT purposes. It’s the first grant of a major interest to a person outside of the group that is the first grant for the purposes of zero rating.

The member of the group actually making that grant must have ‘person converting’ status (read paragraph 5.5.4). Under VAT grouping rules all supplies are considered to be made by the representative member, but this will not prevent zero rating from applying if the member that would make the supply but for this rule has ‘person constructing’ status.

5.7 Land, garages and partly converted buildings

5.7.1 How much land you can zero rate

If you’re making a zero-rated sale of, or long lease in, a building or dwelling you can normally zero rate with the sale or long lease:

• the land on which the building stands (the ‘foot print’)
• a reasonable plot of land surrounding it (this will depend on the size, nature and situation of the building and the nature of the surrounding land, for example, a garden would be acceptable but not a field or paddock)
• the right to park a vehicle, so long as the parking place is close by and is intended to be used in conjunction with the building or dwelling

Further information on grants of parking facilities with dwellings can be found in Land and property (VAT Notice 742).

5.7.2 Garages

You can also zero rate along with the zero-rated sale or long lease of a building designed as a dwelling or number of dwellings, a new garage or a garage resulting from the conversion of a non-residential building provided that the garage:

• came about at the same time as the building was converted into a building ‘designed as a dwelling or number of dwellings’
• is intended to be occupied with the dwelling or one of the dwellings

5.7.3 Partly converted buildings

Subject to the conditions at paragraph 5.1.2, you can zero rate the sale of, or long lease in, a building where a real and meaningful start on the conversion has been made. This means that the work must have been more than securing or maintaining the existing structure.

5.8 Apportionment

5.8.1 Apportionment for converted parts of buildings

You can only zero rate the sale of, or long lease in, a building (or part of a building) when the new qualifying residential accommodation is created wholly from a non-residential building or part of a building.

If you carry out a mixture of qualifying and non-qualifying conversions in a building you can zero rate the sale of, or long lease in, the qualifying parts and apportion your charge. For example you convert a:

• shop into a flat and refurbish existing flats above the shop that have been lived in within the last 10 years, you can zero rate the sale of, or long lease in, the converted shop but not the refurbished flats
• 2-storey public house containing private living areas and bar areas into a pair of flats, the living areas have been ‘used as a dwelling’ (read paragraph 5.3.1) and so the sale of, or long lease in, those parts cannot be zero-rated, the sale of, or long lease in, the converted bar areas can be zero-rated provided that the new flat is created solely from the non-residential areas (read paragraph 5.3.5)

5.8.2 Apportionment for mixed sites

If you sell or long lease a development site containing a mixture of buildings that qualify for zero rating as the conversion of a non-residential building (or part of a building) and other buildings, you must apportion the liability of your supply between them on a fair and reasonable basis.

6. Zero rating the conversion of non-residential buildings for relevant housing associations

6.1 The basic conditions

6.1.1 Introduction

If you carry out work to an existing building you will normally have to charge VAT at the standard rate or the reduced rate. You may be able to zero rate your supply if you provide conversion services to a relevant housing association and during the course of your work you convert a non-residential building into a:

• new eligible dwelling (referred to as a building ‘designed as a dwelling’ and explained at paragraph 14.2)
• building that will be used solely for a ‘relevant residential purpose’ (read paragraph 14.6)

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods.

6.1.2 Zero rate your services

Your services can be zero-rated when all of the following conditions are met:

1. Your services are made to a ‘relevant housing association’ (paragraph 6.2).
2. A building is the subject of a ‘non-residential conversion’ (paragraph 6.3).
3. Your services are made ‘in the course of the conversion’ of that building (paragraph 6.4).
4. Where necessary, you hold a valid certificate (read paragraph 6.2.2 and section 17).
5. Your services are not specifically excluded from zero rating (read paragraph 6.5).

For an explanation of when you may need to apportion your charges read paragraph 6.6.

6.2 Services made to a ‘relevant housing association’

6.2.1 Meaning of ‘relevant housing association’

A ‘relevant housing association’ is a:

• private registered provider of social housing
• registered social landlord within the meaning of part I of the Housing Act 1996 (Welsh registered social landlords)
• registered social landlord within the meaning of the Housing (Scotland) Act 2001 (asp 10) (Scottish registered social landlords)
• registered housing association within the meaning of part II of the Housing (Northern Ireland) Order 1992 (Northern Irish registered associations)

You should hold evidence to show that your customer is a relevant housing association, such as a copy of their registration certificate, as you may be asked by HMRC to show why your services are zero-rated.

6.2.2 Certificates

If you’re converting the building into a building intended for use solely for a ‘relevant residential purpose’, you must also hold a certificate confirming the intended use of the building. Further information on certificates can be found in section 17.

6.2.3 Subcontractors

Subcontractors services are not made directly to a relevant housing association and are, therefore, not zero-rated (read paragraph 2.1.3).

6.3 Non-residential conversion

A ‘non-residential conversion’ takes place when:

• either the building (or part) being converted has never been used as a dwelling or number of dwellings (read paragraph 6.3.1) or for a relevant residential purpose (read paragraph 14.6)
• in the 10 years immediately before the start of your work (read paragraphs 6.3.2 to 6.3.4) the building (or part) has not been used as a dwelling or number of dwellings or for a ‘relevant residential purpose’

It’s converted into a building:

• either ‘designed as a dwelling or number of dwellings’ (read paragraph 14.2)
• intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6)

Examples of a ‘non-residential conversion’ into a building designed as a dwelling or number of dwellings include the conversion of:

• a commercial building (such as an office, warehouse, shop)
• an agricultural building (such as a barn)
• a redundant school or church

The conversion of a garage, occupied together with a dwelling, into a building designed as a dwelling is not a non-residential conversion.

The term ‘garage’ not only covers buildings designed to store motor vehicles but also buildings such as barns to the extent that they’re used as garages.

But if it can be established that the garage was never used to store vehicles or has not been used as a garage for a considerable period of time prior to conversion, its conversion into a building designed as a dwelling can be a non-residential conversion.

6.3.1 The meaning of ‘use as a dwelling’

A building is ‘used as a dwelling’ when it has been designed or adapted for use as someone’s home and is so used. The living accommodation need not have been self-contained or to modern standards. So, buildings that have been ‘used as a dwelling’, include:

• public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self-contained, normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas
• bedsit accommodation
• crofts

If you convert these types of property into a building ‘designed as a dwelling or number of dwellings’, or intended for use solely for a ‘relevant residential purpose’, then, unless the 10-year rule applies, your services cannot be zero-rated.

6.3.2 The 10-year rule

You cannot normally zero rate work to a property that has previously been lived in. Subject to the conditions at paragraph 6.1.2, the exception to this is where, in the 10 years immediately before you start your work, it has not been lived in and following the work it is ‘designed as a dwelling’ or intended for use solely for a ‘relevant residential purpose’.

If the property starts being ‘used as dwelling’ or for a ‘relevant residential purpose’ whilst your work is being carried out, then any work that takes place after that point is not zero-rated.

6.3.3 Proof that the building has been empty for 10 years

You may be required to show that that the building has not been lived in during the 10 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.

If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 10 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in he should write with their best estimate. We may then call for other supporting evidence.

6.3.4 Establish when a dwelling was last lived in

When considering when a dwelling was last lived in, you can ignore any:

• illegal occupation by squatters
• occupation by ‘guardians’
• use that is not residential in nature, such as storage for a business

A ‘guardian’ is a person who is installed in a property by the owner or on behalf of the owner to deter squatters and vandals. They may pay a low rent on terms that fall short of a formal tenancy. Alternatively, they may be paid to occupy the property.

A ‘guardian’ is to be distinguished from a caretaker or housekeeper who lives permanently in the property. Property occupied by a caretaker or housekeeper is likely to be furnished throughout.

If the dwelling has been lived in on an occasional basis (for example, because it was a second home) in the 10 years immediately before you start your work you cannot zero rate your supply.

6.3.5 Merging non-residential parts of a building with other parts

To qualify for zero rating, the conversion must only use non-residential parts of the building.

For example, if you convert a 2-storey public house containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ ― read paragraph 6.3.1) into 2 flats, one being created out of the bar areas and one being created out of the private living area, only the conversion of the former can be zero-rated.

On the other hand, if the conversion uses a mixture of non-residential parts of the building and other parts, none of your services can be zero-rated.

None of your work would be zero-rated and you could not apportion your charge if you converted a 2-storey public house, containing bar areas downstairs and private living areas upstairs (and so was in part being ‘used as a dwelling’ ― read paragraph 6.3.1) into either a:

• single house
• pair of semi-detached houses, by splitting it vertically, each of which uses part of what was the living accommodation

6.3.6 Garages

You can zero rate work to construct a new garage, or to convert a non-residential building into a garage, provided that the:

• work is carried out at the same time as the conversion of a non-residential building into a building ‘designed as a dwelling or number of dwellings’
• garage is intended to be occupied with the dwelling or one of the dwellings

6.4 Services made ‘in the course of the conversion’

Your services are supplied in the course of the conversion when you:

• physically carry out the conversion
• provide any other service closely connected to the conversion, the guidance at paragraphs 3.3.4 to 3.3.7 applies in the same way to this section as it does to section 3

6.5 Services excluded from zero rating

6.5.1 Architects, surveyors, consultants and supervisors

The supply of architectural, surveying, consultancy and supervisory services is always standard-rated.

For an explanation of when a standard-rated supply takes place under different types of building contracts and the treatment of ‘design and build’ contracts read paragraph 3.4.1.

6.5.2 Goods on hire

Goods hired on their own are always standard-rated. Examples of standard-rated hire are given at paragraph 3.4.2.

6.5.3 Goods put to a temporary private use

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services (for more information read VAT guide (VAT Notice 700)). Such supplies are not zero-rated under the rules in this section.

6.6 Apportionment

6.6.1 Apportionment for converting parts of buildings

You can only zero rate your work when the new qualifying residential accommodation is created wholly from a non-residential building or part of a building (read paragraph 6.3.5). If this is not the case, you cannot apportion your charge. But you must apportion your charge on a fair and reasonable basis between qualifying conversion work and other work you do at the same time.

Example

You convert a shop into a flat and refurbish existing flats above the shop that have been lived in within the last 10 years. You can zero rate the work to convert the shop but not the refurbishment of the flats.

6.6.2 Apportionment for mixed sites

Where a service is supplied in part in relation to the conversion of a non-residential building and in part for other purposes, a fair and reasonable apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

Example

A road that serves the building being converted and a neighbouring house (for example, a barn and a farmhouse) is upgraded as part of the conversion. As the road serves both buildings, the work carried out relates, in part, to the conversion and, in part, for other purposes. The liability of upgrading the road may be apportioned on a fair and reasonable basis.

If you decide not to make an apportionment, then none of your work can be zero-rated.

7. Reduced rating the conversion of premises to a different residential use

7.1 The conditions

7.1.1 Introduction

If you carry out work to an existing building, you will normally have to charge VAT at the standard rate. You may be able to charge VAT at the reduced rate of 5% if you’re converting premises into a:

• ‘single household dwelling’ (read paragraph 14.4)
• different number of ‘single household dwellings’ (read paragraph 14.4)
• ‘multiple occupancy dwelling’, such as bedsits (read paragraph 14.5)
• premises intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6)

The remainder of this section explains the detailed conditions that need to be met before you can reduce rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods. If you install goods that are not building materials (such as carpets or fitted bedroom furniture) you must also standard rate your installation charge. This is explained further at paragraph 7.6.

7.1.2 The basic conditions

Your services can be reduced-rated when all of the following conditions are met:

1. A qualifying conversion is carried out (read paragraphs 7.2 to 7.5).
2. Where necessary, you hold a valid certificate (read section 17).
3. Your services are qualifying services (read paragraph 7.6).

For an explanation of when you may need to apportion your charges read paragraph 7.7.

7.2 Summary of qualifying conversions

The following table summarises the types of conversion that are ‘qualifying conversions’. For full details you should read the appropriate paragraph.

Dwellings	Single household dwellings ― read paragraph 14.4 ― after conversion	Multiple occupancy dwellings ― read paragraph 14.5 ― after conversion	Relevant residential purpose building ― read paragraph 14.6 ― after conversion
Single household dwellings before conversion	Not normally a qualifying conversion, but if there’s a change in the number of single household dwellings read paragraph 7.3	read paragraph 7.4	read paragraph 7.5
Multiple occupancy dwellings before conversion	read paragraph 7.3	Not a qualifying conversion	read paragraph 7.5
Relevant residential purpose building before conversion	read paragraph 7.3	read paragraph 7.4	Not a qualifying conversion
Any premises not listed, such as a building that has never been lived in	read paragraph 7.3	read paragraph 7.4	read paragraph 7.5

7.3 Conversions into single household dwellings

A qualifying conversion is carried out when the premises being converted is a building, or part of a building, and after the conversion the premises contains a greater or lower number (but not less than one) of ‘single household dwellings’ (read paragraph 14.4), but not where the number of ‘single household dwellings’ in part of the premises is unchanged (read paragraph 7.3.1).

A qualifying conversion includes the conversion of:

• a property that has never been lived in, such as an office block or a barn
• a multiple occupancy building such as a bedsit block
• living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
• any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice

It does not include the:

• creation of living accommodation that is not a ‘single household dwelling’, such as most ‘granny’ annexes or additional bedrooms at a care home
• renovation or alteration of living accommodation that had been used for other purposes without the premises being adapted, such as a flat above a shop that has been used for storage, if the living accommodation has not been lived in for 2 years or more, the reduced rate explained in section 8 may apply

7.3.1 Converting and refurbishing different parts of the building at the same time

Work that is unrelated to changing the number of dwellings cannot be reduced-rated.

Example 1

A block of flats consists of 4 floors, each with 4 flats. A lift is installed, and work is carried out throughout the whole building. On the ground, first and second floors the footprint of each flat is changed to take account of the new lift. This results in the internal configuration of each flat being changed. On the third floor 3 penthouse flats are created from the original 4.

Although the overall number of single household dwellings in the building has changed (there has been a reduction by one unit) only the work to convert the third floor will be eligible for the reduced rate because it is only in this part of the building that the number of dwellings has changed. But read also the next example.

Example 2

Taking example 1, if the reduction in the number of flats on the third floor happens by combining 2 of the original flats together, the other 2 being refurbished, then the reduced rate will only apply to the work to merge the 2 flats together.

Example 3

Taking example 1, as well as the changes to the top floor, the number of flats on the ground floor is changed to 5 smaller units. In this example, the overall number of dwellings in the building has not changed (there are 16 units both before and after the work). But as parts of the building are examined independently, and because the respective parts of the building meet the conditions at paragraph 7.3, the reduced rate can apply to the work to convert those parts.

7.4 Conversions into multiple occupancy dwellings

A qualifying conversion is carried out when a building, or part of a building, before conversion does not contain any multiple occupancy dwellings (read paragraph 14.5). After conversion, the premises contain only one or more multiple occupancy dwellings, and the premises are not intended to be used to any extent for a relevant residential purpose (read paragraph 14.6).

A qualifying conversion includes the conversion into a multiple occupancy dwelling of a:

• single household dwelling
• building used for a relevant residential purpose, such as a care home
• property that has never been lived in

It does not include, for example, the creation of additional bedrooms at a dwelling consisting of bedsits.

7.5 Conversions into premises intended for use for a relevant residential purpose

A qualifying conversion is carried out when the premises being converted are one or more buildings or parts of buildings. Before conversion, those premises must not have been last used to any extent for a relevant residential purpose (read paragraph 14.6). After conversion, those premises are intended to be used solely for a relevant residential purpose.

A qualifying conversion includes the conversion into premises that will be used solely for a relevant residential purpose of a:

• single household dwelling
• multiple occupancy dwelling
• property that has never been lived in

It does not include:

• the remodelling of an existing ‘relevant residential purpose’ building, such as a care home
• any conversion where a new qualifying residential ‘home’ or ‘institution’ is not created in its entirety, such as the conversion of outbuildings into additional bedrooms for an existing care home

7.6 Reduced rate services

Other than installing goods that are building materials (read paragraph 13.8) for examples of building materials), you can also reduce rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the building.

You can also reduce rate works within the immediate site of the premises being converted that are in connection with the:

• means of providing water, power, heat or access
• means of providing drainage or security
• provision of means of waste disposal

All other services are standard-rated. For example, you must standard rate:

• the installation of goods that are not building materials, such as carpets and fitted bedroom furniture
• the erection and dismantling of scaffolding
• the hire of goods
• landscaping
• the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors

7.6.1 Garages

You can reduce rate the:

• conversion of an outbuilding into a garage
• construction of a new detached garage
• construction of a drive serving the garage

This is provided both these conditions are met:

• the garage is intended to be occupied with the ‘single household dwelling’, ‘multiple occupation dwelling’, or the premises intended for use solely for a ‘relevant residential purpose’ resulting from the qualifying conversion
• the work is carried out at the same time as the qualifying conversion

But you cannot reduce rate the provision of a hardstanding unless it is also used as an access.

7.6.2 Building control and planning consent

If you carry out work that requires statutory planning consent or statutory building control and it has not been granted, then your work is standard-rated.

7.7 Apportionment

You can only reduce rate those services detailed in paragraph 7.6 when they’re supplied in the course of a qualifying conversion. If your services cover a wider range of work then you may apportion your charge on a fair and reasonable basis. If you decide not to make an apportionment then none of your work can be reduced-rated.

8. Reduced rating the renovation or alteration of empty residential premises

8.1 The conditions

8.1.1 Introduction

If you carry out work to an existing building you will normally have to charge VAT at the standard rate. You may be able to charge VAT at the reduced rate of 5% if you’re renovating or altering either:

• an eligible dwelling that has not been lived in during the 2 years immediately before your work starts (although there’s an exception explained at paragraph 8.3.4)
• premises intended for use solely for a ‘relevant residential purpose’ (read paragraph 14.6 that have not been lived in during the 2 years immediately before you start your work)

The remainder of this section explains the detailed conditions that need to be met before you can reduce rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods. If you install goods that are not building materials (such as carpets or fitted bedroom furniture) you must also standard rate your installation charge. This is explained further at paragraph 8.4.

8.1.2 The basic conditions

Your services can be reduced-rated when all of the following conditions are met:

1. You renovate or alter ‘qualifying residential premises’ (read paragraph 8.2).
2. The premises have not been lived in for 2 years or more (read paragraph 8.3).
3. Where necessary, you hold a valid certificate (read section 17).
4. Your services are ‘qualifying services’ (read paragraph 8.4).

For an explanation of when you may need to apportion your charges read paragraph 8.5.

8.2 The meaning of ‘qualifying residential premises’

‘Qualifying residential premises’ means a:

• single household dwelling (read paragraph 14.4)
• multiple occupancy dwelling, such as bed-sits (read paragraph14.5)
• building (or part of a building) which, when last lived in, was used for a relevant residential purpose (read paragraph 14.6), and after the renovation or alteration will be used solely for such a purpose (read paragraph 8.2.1)
• building (or part of a building) which, when last lived in, was one of a number of buildings on the same site that were used together as a unit for a relevant residential purpose, and after the renovation or alteration will be used solely for such a purpose (read paragraph 8.2.1)

8.2.1 Premises used for a ‘relevant residential purpose’

The premises being renovated or altered must be used solely for a ‘relevant residential purpose’ after the works have been carried out. The recipient of your supply must confirm this by giving you a certificate. You can read more about certificates for qualifying buildings in section 17.

Where a building, when last lived in, was one of a number of buildings on the same site used together as a unit for a relevant residential purpose (for example a number of buildings that together formed a care home) you need not renovate or alter all of the buildings for the reduced rate to apply.

But those that are renovated or altered must be used together as a unit solely for a relevant residential purpose and a certificate issued.

8.3 Rules for premises that have been lived in recently

8.3.1 The 2-year rule

You can only reduce rate the renovation or alteration if, in the 2 years immediately before renovation works start, the qualifying residential premises has not been lived in.

If the premises is a building (or part of a building) which, when last lived in, was 1 of a number of buildings on the same site used together as a unit for a relevant residential purpose, then none of the buildings making up the original unit must have been lived in during the 2 years immediately before your work starts. So you cannot, for example, reduce rate the renovation or alteration of a dormant building within the grounds of an operational home or institution.

8.3.2 Proof that the premises has been empty for 2 years

If you reduced-rated your supply, you may be required to show that the building has not been lived in during the 2 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.

If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for 2 years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in, they should write with a best estimate. We may then call for other supporting evidence.

8.3.3 What use can be ignored

You can ignore any use that is:

• illegal occupation by squatters
• occupation by ‘guardians’
• non-residential use, such as storage for a business

A ‘guardian’ is a person who is installed in a property by the owner or on behalf of the owner to deter squatters and vandals. They may pay a low rent on terms that fall short of a formal tenancy. Alternatively, they may be paid to occupy the property.

A ‘guardian’ is to be distinguished from a caretaker or housekeeper who lives permanently on the property. Property occupied by a caretaker or housekeeper is likely to be furnished throughout.

If the dwelling has been lived in on an occasional basis (for example, because it was a second home) in the 2 years immediately before you start your work you cannot reduce rate your supply.

8.3.4 People living in the premises whilst you carry out the work

There are 2 empty house rules for situations when people are living in the premises while refurbishment work is being carried out. The first relates to all qualifying premises (read paragraph 8.2).The second only relates to ‘single household dwellings’.

First rule

If the ‘qualifying residential premises’ have not been lived in during the 2 years immediately before your work starts, all of your work is reduced-rated. This is the case even if the premises start to be lived in again while you are carrying out your work. The occupier must move in on a day after you start your work.

But if, when your work starts, the premises are already being lived in, or have been lived in during the previous 2 years, all of your work is standard-rated.

Second rule

You can reduce rate your services of the refurbishment or alterations to a ‘single household dwelling’ where all the following conditions are met:

1. The 2 years immediately before the occupier acquired the dwelling it had not been lived in.
2. No renovation or alteration had been carried out in the 2 years before the occupier acquired the dwelling (you can ignore minor works that were necessary to keep the dwelling dry and secure).
3. Your services are supplied to the occupier ― so if you are a subcontractor you must standard rate your work.
4. Your services take place within 1 year of the occupier acquiring the dwelling.

This exception to occupation will not apply to the renovation or alteration of multiple occupancy dwellings or buildings intended for use for a relevant residential purpose.

8.4 Reduced rate services

Other than installing goods that are building materials (read paragraph 13.8) for examples of building materials), you can also reduce rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the dwelling.

You can also reduce rate works within the immediate site of the dwelling that are in connection with the:

• means of providing water, power, heat or access
• means of providing drainage or security
• provision of means of waste disposal

All other services are standard-rated. For example, you must standard rate:

• the installation of goods that are not building materials, such as carpets or fitted bedroom furniture
• the erection and dismantling of scaffolding
• the hire of goods
• landscaping
• the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors

8.4.1 Garages

If premises consisting of a single household dwelling, multiple occupancy dwelling, or building used for a relevant residential purpose are renovated or altered at the reduced rate, you can also reduce rate the:

• renovation of a garage
• construction of a garage
• conversion of a building into a garage

Both the following conditions must be met:

• work is carried out at the same time as the renovation or alteration of the premises concerned
• the garage is intended to be occupied with the renovated or altered premises

But you cannot reduce rate the provision of a hardstanding unless it is also used as an access.

8.4.2 Building control and planning consent

If you carry out work that requires statutory planning consent or statutory building control and it has not been granted, then your work is standard-rated.

8.5 Apportionment

You can only reduce rate those services detailed in (read paragraph 8.4) when they’re supplied in the course of a qualifying renovation or alteration. If your services cover a wider range of work then you may apportion your charge on a fair and reasonable basis. If you decide not to make an apportionment then none of your work can be reduced-rated.

9. Transitional historical arrangements

Transitional historical arrangements for zero rating approved alterations to the first grant of a major interest in protected buildings.

This section has been retained because although all zero rating for approved alterations ended in September 2015 the information contained within it may still be required.

9.1 Changes effective from 1 October 2012

9.1.1 Withdrawal of zero rating for works on an approved alteration to a protected building

Prior to 1 October 2012 work undertaken in the course of an approved alteration to a protected building (but not including works of repair and maintenance) was treated as zero-rated. With effect from that date the zero rate has been withdrawn.

9.1.2 Transitional relief

To mitigate the impact of the change a transitional relief was applied until 30 September 2015.

This means that supplies of approved alterations were standard-rated with effect from 1 October 2012 unless they qualified for:

• continued relief under the transitional rules
• zero or reduced rating under another part of the VAT law

For the remainder of this section present tense is retained although the conditions it describes are now historic.

9.1.3 Transitional arrangements

Under the transitional arrangements, zero rating will continue to apply where in respect of the works a ‘relevant consent’ was applied for before 21 March 2012 or a written ‘contract’ was entered into before 21 March 2012, this included contracts already underway on 21 March 2012 (providing that this is supported by evidence).

9.1.4 Relevant consent

For most buildings relevant consent means listed building consent. But where the building is a listed place of worship that is exempted from the usual listed building controls under section 60 of the Planning and (Listed Buildings Conservation Areas) Act 1990 it will refer to whatever consent for the approved alterations is required by the competent authority.

9.1.5 Contract

The contract referred to in the transition arrangements is the written contract with the builder, not the architects’ plans, planning permission and so on.

9.1.6 Listed places of worship

The changes apply to the listed places of worship. But the government has extended the scope of the listed places for the Listed Places of Worship Grant Scheme so that it covers alterations as well as repairs.

9.2 Rules prior to 1 October 2012

Applicable to works eligible for the period of transitional relief ending 30 September 2015.

If you carry out work to an existing building you will normally have to charge VAT at the standard rate. You may be able to zero rate your supplies if you’re involved in altering a listed building or scheduled monument which will:

• remain as or become an eligible dwelling (referred to as a building ‘designed to remain as or become a dwelling’, explained in paragraph 14.3)
• be used solely for a ‘relevant residential purpose’ (read paragraph 14.6)
• be used solely for a ‘relevant charitable purpose’ (for a charity’s non-business use or as a village hall (read paragraph14.7))

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your services.

If you supply and install goods with your services, you will also need to read section 11 to determine the liability of those goods.

9.2.1 The basic conditions

Your services can be zero-rated when all of the following conditions are met:

1. Work is carried out to a ‘protected’ building (read paragraph 9.3).
2. The work is an ‘alteration’ of a protected building and is not work of ‘repair or maintenance’ (read paragraph 9.4).
3. The alteration is ‘approved’ (read paragraph 9.5).
4. Your services are made ‘in the course of the approved alteration’ of that building (read paragraph 9.6).
5. Where necessary, you hold a valid certificate (read section 17).
6. Your services are not specifically excluded from zero rating (read paragraphs 9.4 and 9.7).

For an explanation of when you may need to apportion your charges you should read paragraph 9.7.

9.3 Work to a protected building

9.3.1 Meaning of a ‘protected’ building

A protected building is a building that is either a listed building (read paragraphs 9.3.2 and 9.3.3) or a scheduled monument (read paragraph 9.3.4) and is:

• designed to remain as or become a dwelling or number of dwellings (read paragraph 14.3)
• intended for use solely for a relevant residential purpose (read paragraph 14.6)
• intended for use solely for a relevant charitable purpose (read paragraph 14.7)

9.3.2 Listed building

A listed building is one included in a statutory list of buildings of special architectural or historic interest compiled by the Secretary of State for National Heritage in England and by the Secretaries of State for Scotland, Wales and Northern Ireland. There are 3 categories of listing with different names depending on the country.

Categories in England and Wales include:

• Grade I
• Grade II*
• Grade II

In Scotland the equivalent categories are:

• Grade A
• Grade B
• Grade C

In Northern Ireland the equivalent categories are:

• Grade A
• Grade B+
• Grade B

Buildings within the curtilage of a listed building such as outhouses or garages which, although not fixed to the building, form part of the land and have done so since before 1 July 1948 (for example, an outhouse) are treated for planning purposes as part of the listed building.

Unlisted buildings in conservation areas, or buildings included in a local authority’s non-statutory list of buildings of local interest, which used to be known as Grade III buildings, are not ‘protected’ buildings for VAT purposes.

9.3.3 Garages and other curtilage buildings

As described in paragraph 9.3.2, garages and other curtilage buildings can be treated for planning purposes as part of the listed building.

For VAT purposes any approved alteration carried out to such buildings can only be zero-rated if the building being altered falls within 1 of the descriptions in paragraph 9.3.1. For example, the conversion of an outhouse in the curtilage of a dwelling to a swimming pool cannot be zero-rated as that building is not ‘designed to remain as or become a dwelling’ in its own right.

Approved alterations to garages in the curtilage of a building ‘designed to remain as or become a dwelling’ can be zero-rated provided that the garage is occupied together with the dwelling, and was either constructed at the same time as the dwelling or, where the dwelling has been substantially reconstructed, at the same time as that reconstruction.

A garage need not be a building designed to store motor vehicles, the term can also apply to a building adapted to store motor vehicles such as a barn.

9.3.4 A scheduled monument

A scheduled monument is one included in a statutory schedule of monuments of national importance as defined in the Ancient Monuments and Archaeological Areas Act 1979 or the Historic Monuments and Archaeological Object (Northern Ireland) Order 1995.

You can only zero rate an approved alteration to a scheduled monument if it’s a building that meets the conditions at paragraph 9.2.1.

9.4 Altering a protected building

A building is altered when its fabric, such as its walls, roof, internal surfaces, floors, stairs, windows, doors, plumbing and wiring is changed in a meaningful way.

Alterations carried out for the purposes of repair or maintenance, or any incidental alteration resulting from works of repair or maintenance, are always standard-rated, even if the work has been included in the listed building or scheduled monument consent.

9.4.1 Works of repair or maintenance

Works of repair or maintenance are those tasks designed to minimise, for as long as possible, the need for, and future scale and cost of, further attention to the fabric of the building. Changes to the physical features of the building are not zero-rated alterations if, in the exercise of proper repair and maintenance of the building, they’re either:

• trifling or insignificant
• dictated by the nature and use of modern building materials

Similarly, if the amount of work or cost is significant, that does not make the work a zero-rated alteration if the inherent character of the work is repair and maintenance.

9.4.2 Examples of repair or maintenance work and alterations

The following are examples of repair or maintenance work and alterations. Remember you can only zero rate alterations when all of the conditions in paragraph 9.1.2 are met.

Alterations to a listed building include:

• extensions
• opening or closing doorways
• replacement of uPVC double glazing with copies of original wooden windows for aesthetic reasons
• installing a window where one did not exist before
• replacement of a flat roof with a pitched roof
• extending wiring and plumbing systems
• replacing a boiler with a larger capacity boiler whilst extending plumbing systems
• flood lighting ― when installed on the building, but neither an alteration nor repair or maintenance (and therefore standard-rated) when installed within the grounds of a building ― there is no work to the fabric of the building

You will apply VAT treatment as repair or maintenance on work for:

• replacement of rotten wooden windows with uPVC double glazing
• re-felt and batten roof
• damp proofing
• re-decorating
• re-pointing
• re-wiring
• replacement of straw thatch with reeds and changes to the ridge detail of a thatched roof ― repair or maintenance when carried out as part of the normal renewal programme

Making good follows the liability of the main work.

9.4.3 Repairs to listed places of worship

The Department of Culture Media and Sport administers a grant scheme for repairs to listed places of worship. The scheme can refund the full amount of VAT spent on eligible repairs, but this will depend on the funds available. Further information on the scheme can be obtained from:

Listed Places of Worship Grant Scheme
PO Box 609
Newport
NP10 8QD

Telephone: 0845 601 5945
Website: www.lpwscheme.org.uk

9.4.4 Constructing and altering curtilage structures, including walls, fences and railings

Paragraph 9.3.3 explains that approved alterations to existing curtilage structures only qualify for zero rating when the structure is a protected building.

The construction of a building or structure in the grounds of a protected building is never an alteration of a protected building and is not zero-rated under the rules in this section. But zero rating may be available under the rules in section 3.

The construction of (and the alteration to) fences, walls and railings (both freestanding and attached to the protected building) and other curtilage structures, such as patios and terraces, are standard-rated.

9.5 Approved alteration

In most cases an approved alteration is an alteration for which listed building consent is both needed and has been obtained from the appropriate planning authority (or, in some circumstances, the Secretary of State) prior to the commencement of the work. In each case you will need to find out from your customer (or their architect or surveyor) to what extent the work you have been contracted to do has both required and received listed building consent.

If you’re working on a church, a building on Crown or Duchy land, or a scheduled monument, you should read paragraphs 9.5.4 to 9.5.6.

9.5.1 Listed building consent

Listed building consent is not the same as planning permission. In general terms, listed building consent is needed for work on a listed building which would affect its character as a building of special architectural or historic interest. The construction of an extension, or alterations following partial demolition, would certainly require consent but it’s not possible to generalise about less radical work especially as regards internal alterations.

9.5.2 Unauthorised work

If you carry out work to a listed building without obtaining any required listed building consent, you’re committing an offence.

The planning authority cannot issue retrospective listed building consent for the work. But they may permit you to keep the unauthorised works. Such works are not approved alterations (because consent has not been granted at the time the work is carried out) and are standard-rated.

9.5.3 Listed building enforcement notices

Where works to a listed building are carried out without listed building consent being obtained or which do not comply with a condition in the consent, the local planning authority may issue a ‘listed building enforcement notice’ for the carrying out of further work.

An alteration, which is not work of repair or maintenance, read paragraph 9.4, to the fabric of the building under the terms of an enforcement notice is an approved alteration.

9.5.4 Places of worship and ecclesiastical exemption

Many listed places of worship are not subject to the usual controls over listed buildings. This is known as ecclesiastical exemption and it exempts a place of worship from listed building and conservation area control. It does not exempt the place of worship from being charged VAT on those works.

In England and Wales 6 Christian denominations have ecclesiastical exemption. They are the:

• Church of England
• Church in Wales
• Roman Catholic Church
• Methodist Church
• Baptist Union of Great Britain and the Baptist Union of Wales
• United Reformed Church

In Scotland and Northern Ireland, all listed places of worship that are in ecclesiastical use, are exempt from listed building controls, although they’re still subject to planning controls.

Any alteration, which is not work of repair or maintenance (read paragraph 9.4) to the fabric of a listed place of worship that has ecclesiastical exemption, is an approved alteration.

Ecclesiastical exemption does not extend to dwellings occupied by ministers of religion and the normal listed building consent procedure applies.

9.5.5 ‘Crown’ and ‘Duchy’ interest buildings

Listed building consent may not be needed for alterations to buildings on Crown or Duchy land even though it would be needed for similar alterations to listed buildings elsewhere.

In this case, an alteration to the fabric of the building which would otherwise have required consent and which is not work of repair or maintenance (read paragraph 9.4), is an approved alteration.

9.5.6 Scheduled monuments

All works affecting scheduled monuments require scheduled monument consent from the Secretary of State. Approved alterations are those works of alteration for which consent has been obtained.

It’s possible for a building to be both scheduled and listed. If so, only scheduled monument procedures apply and it should be treated as a scheduled monument for VAT purposes.

9.6 Services made ‘in the course of an approved alteration’ of a protected building

Your services are supplied ‘in the course of an approved alteration’ of a protected building when you:

• physically carry out the approved alteration
• provide any other service closely connected to the alteration ― the guidance at paragraphs 3.3.4 to 3.3.7 applies in the same way to this section as it does to section 3

So, even if your work did not require approval (read paragraph 9.5) it can still be zero-rated provided it’s closely connected to an approved alteration. Examples include:

• preparation work for an approved alteration
• the carrying out of remedial work resulting from an approved alteration

9.7 Services excluded from zero rating

9.7.1 Architects, surveyors, consultants and supervisors

The supply of architectural, surveying, consultancy and supervisory services is always standard-rated.

For an explanation of when a standard-rated supply takes place under different types of building contract and the treatment of design and build contracts, read paragraph 3.4.1.

9.7.2 Goods on hire

Goods hired on their own are always standard-rated. Examples of standard-rated hire are given at paragraph 3.4.2.

9.7.3 Goods put to a temporary private use

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services ― read VAT guide (VAT Notice 700) for more information. Such supplies are not zero-rated under the rules in this section.

9.8 Apportionment

9.8.1 Repair and maintenance

Works of repair or maintenance are standard-rated. If you’re supplying both zero-rated and standard-rated work you may apportion your supply on a fair and reasonable basis to reflect the differing liabilities.

If you decide not to make an apportionment then none of your work can be zero-rated.

9.8.2 Qualifying parts of buildings

You cannot zero rate work to a whole building where only part of it is a ‘protected’ building. But you can zero rate the work to the qualifying parts.

For example, if you carry out alterations to a listed building used by a charity, it may be that only part of the building will be used solely for a ‘relevant charitable purpose’. If so, only the approved alterations to that part of the building can be zero-rated.

9.8.3 Mixed site developments

Where a service (such as the carrying out of civil engineering work) is supplied in part in relation to an approved alteration and in part for other purposes, a fair and reasonable apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

If you decide not to make an apportionment then none of your work can be zero-rated.

10. Zero rating the sale of, or long lease in, substantially reconstructed protected buildings

10.1 Changes from 1 October 2012

10.1.1 Restriction of zero rating for the first grant of a major interest of a substantially reconstructed protected building

Prior to 1 October 2012, zero rating applied to the first grant of a major interest by a person substantially reconstructing a protected building. A major interest means the freehold (in Scotland, the absolute interest) or a lease for over 21 years, though not less than 20 in Scotland.

With effect from 1 October 2012 the zero rate for the first grant of a major interest in a substantially reconstructed protected building has been withdrawn in those cases where zero rating relies on three-fifths of the work (measured by cost) being approved alterations.

But zero rating continues to apply where the first grant of the major interest relates to a protected building substantially reconstructed from a shell (as explained further within this section).

10.1.2 Transitional relief

To mitigate the impact of the change a transitional relief will apply until 30 September 2015.

10.1.3 Transitional arrangements

The first grant of a major interest in a substantially reconstructed protected building, where three-fifths of the work (by cost) relates to approved alterations will be eligible for zero rating where either:

• the approved alterations are within the scope of a ‘relevant consent’ applied before 21 March 2012 or of a written contract entered into before 21 March 2012
• 10% of the substantial reconstruction was completed prior to 21 March 2012

10.2 The conditions

The conditions for zero rating the sale of, or long lease in substantially reconstructed buildings (and applicable to works eligible for the period of transitional relief ending 30 September 2015).

The rules will continue to be relevant for sales and long leases (grants of major interests), after 30 September 2015, where these relate to a protected building substantially reconstructed from a shell.

10.2.1 Introduction

The sale of, or lease in, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT, depending on the circumstances. If you substantially reconstruct a listed building that after the reconstruction:

• is designed to remain as or become an eligible dwelling (referred to as a building ‘designed to remain as or become a dwelling’ and explained in paragraph 14.3
• will be used solely for a ‘relevant residential purpose’ read paragraph 14.6
• will be used solely for a ‘relevant charitable purpose’ (for a charity’s non-business use or as a village hall ― read paragraph 14.7

You may be able to zero rate your first sale of, or long lease in, the property.

The remainder of this section explains the detailed conditions that need to be met before you can zero rate your supply.

For an explanation of when a developer cannot recover input tax on goods incorporated in a zero-rated building read section 12.

If you cannot zero rate your supply you should read Land and property (VAT Notice 742) to determine if your supply is standard-rated or exempt.

Remember, you cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable (including zero-rated) and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies.

Further information can be found in Partial exemption (VAT Notice 706).

10.2.2 The basic conditions

Your supply can be zero-rated when all the following conditions are met:

1. Work is carried out to a ‘protected’ building (paragraph 10.2).
2. The protected building is ‘substantially reconstructed’ (paragraph 10.3).
3. You grant a major interest in the building (paragraph 10.4).
4. The building is not substantially reconstructed into a holiday home (paragraph 10.5).
5. You substantially reconstruct the building (paragraph 10.6).
6. The grant of a major interest is your first grant (paragraph 10.7).
7. Where necessary you hold a valid certificate (section 17).

For an explanation of when you may need to apportion your charges read paragraph 10.9.

10.3 Work carried out to a protected building

A protected building is a building that is either a listed building (read paragraphs 9.3.2 and 9.3.3) or a scheduled monument (read paragraph 9.3.4) and is:

• designed to remain as or become a dwelling or number of dwellings (read paragraph 14.3)
• intended for use solely for a relevant residential purpose (read paragraph 14.6)
• intended for use solely for a relevant charitable purpose (read paragraph 14.7)

10.4 Substantially reconstructing a protected building

A protected building is substantially reconstructed when:

• reconstruction takes place that is major work to the building’s fabric, including the replacement of much of the internal or external structure
• either
  • at least 60% of the total cost of the reconstruction (including materials and other items to carry out the work but excluding the services of an architect, surveyor or other person acting as consultant or in a supervisory capacity) could be zero-rated as ‘approved alterations’ (read section 9)
  • the reconstruction involves ‘gutting’ the building ― that is no more of the original building is retained than an external wall or walls, or external walls together with other external features of architectural or historic interest

10.4.1 Extensions

A protected building is not ‘substantially reconstructed’ where the only major alteration is the addition of an extension.

But work to extend a protected building could be zero-rated as an approved alteration if supplied by a builder. This means that if you carry out major works to reconstruct a building, then the construction of an extension can count towards your 60% ‘substantial reconstruction’ calculation.

10.4.2 Part-qualifying buildings

You may reconstruct a building where only part of it will be used for a qualifying purpose. When determining if at least 60% of the work could be zero-rated as ‘approved alterations’, all of the work to the building should be considered. But only those alterations to the qualifying parts can count towards the zero-rated element.

10.5 Granting a major interest in the building

You’re granting a major interest in a building when you sell, assign or surrender:

• the freehold
• in relation to England, Wales and Northern Ireland, a lease for a term certain exceeding 21 years
• in relation to Scotland the estate or interest of the owner
• in relation to Scotland, the tenant’s interest under a lease for a term of not less than 20 years

10.6 Reconstructing a protected building as a holiday home

10.6.1 Definition of a ‘holiday home’

A holiday home is a ‘building designed as a dwelling or number of dwellings’ where the person buying or leasing the property is:

• not entitled to reside in the accommodation throughout the year (such as in time share accommodation)
• prevented from residing in the accommodation throughout the year by the terms of a covenant, statutory planning consent or similar permission
• prevented from using the accommodation as their principal private residence by the terms of a covenant, statutory planning consent or similar permission

10.6.2 Tax treatment

The sale or long lease of a holiday home cannot be zero-rated.

If, after reconstruction, the building is less than 3 years old when the sale or long lease is made, the sale or long lease is standard-rated. If the building is 3 years old or more, the sale or long lease is exempt. The long lease is exempt to the extent that the consideration is in the form of a premium.

Any subsequent payments for a lease, such as ground rents and service charges, are standard-rated.

Further information can be found in Hotels and holiday accommodation (VAT Notice 709/3).

10.7 Having ‘person substantially reconstructing’ status

10.7.1 Meaning of ‘person substantially reconstructing’

You’re a ‘person substantially reconstructing’ a protected building if, in relation to that building, you’re acting as, or have, at any point in the past, acted as a:

• developer ― you physically substantially reconstructed a protected building, or commissioned another person to physically substantially reconstruct the building, that you own or have an interest in
• contractor or subcontractor ― that is you provided reconstruction services to the developer or another contractor for the substantial reconstruction of the building, subcontracting work as necessary

10.7.2 Transferrable status for ‘person substantially reconstructing’

The status is transferable. You have inherited person substantially reconstructing status when you acquired a substantially reconstructed protected building as part of a transfer of a going concern. Conditions a), b) and c) at paragraph 4.5.6 also apply.

10.7.3 Supplies by members of VAT groups

For VAT purposes, any business carried on by a member of a VAT group is treated as carried on by the representative member. But when determining whether a supply can be zero-rated, ‘person substantially reconstructing’ status is only considered from the perspective of the group member who, in reality, makes the supply. This might not be the representative member.

For example a VAT group includes a:

• holding company as the representative member and a development company as a member, the development company substantially reconstructs and sells a listed house, it has ‘person substantially reconstructing’ status and so the sale can be zero-rated
• development company as representative member and an investment company as a member, the development company substantially reconstructs a listed block of flats and sells it to the investment company, who in turn leases the flats to the public on long leases, the investment company does not have ‘person substantially reconstructing’ status, even though the representative member has ‘person substantially reconstructing’ status, the leases cannot be zero-rated and are exempt

10.7.4 Beneficial interests

Sometimes the beneficial owner of a property must register for VAT instead of the legal owner ― further information can be found in Land and property (VAT Notice 742).

In such circumstances the beneficial owner must have ‘person substantially reconstructing’ status before the sale or long lease of the property can be zero-rated.

10.8 The ‘first’ grant of a major interest

10.8.1 Work out if you’re making the ‘first’ sale or long lease

Subject to the conditions at paragraph 10.1.2, you can only zero rate your first sale of, or long lease in (read paragraph 4.2) a building (or part of a building). Zero rating is not affected by:

• the length of time between completion of the reconstruction and your sale of, or long lease in, the building
• any sale of, or long lease in, the building made by other people (even if they also have ‘person reconstructing’ status or have made their own zero-rated supply in the building)
• any short leases that may have been made (if you make short leases, you should also read paragraph 4.2.1)
• any sales of, or long leases in, other parts of the building that you may have made, for example, if you reconstruct the building into flats you can zero rate your first long lease in each flat

If you enter into a second or subsequent long lease in the building (or sell the building after leasing it on a long lease) you cannot zero rate your supply and it would normally be exempt from VAT for further information read Land and property (VAT Notice 742).

10.8.2 Supplies within VAT groups

The grant of a major interest between 2 members of the same VAT group is ignored for VAT purposes. It’s the first grant of a major interest to a person outside of the group that’s the first grant for the purposes of zero rating. The member of the group making that grant must have ‘person substantially constructing’ status (read paragraph 10.7.1).

10.9 Land and garages

10.9.1 Amount of land you can zero rate

If you’re making a zero-rated sale of, or entering into a long lease in, a building or dwelling you can normally zero rate with the sale or long lease:

• the land on which the building stands (the ‘foot print’)
• a reasonable plot of land surrounding it (this will depend on the size, nature and situation of the building and the nature of the surrounding land, for example, a garden would be acceptable but not a field or paddock)
• the right to park a vehicle, so long as the parking place is close by and is intended to be used in conjunction with the building or dwelling

Further information on grants of parking facilities with dwellings can be found in Land and property (VAT Notice 742).

10.9.2 Garages

You can also zero rate a garage constructed or converted from a non-residential building provided that both the following conditions are met:

• work is carried out at the same time as the substantial reconstruction of a building ‘designed to remain as or become a dwelling or number of dwellings’
• the garage is intended to be occupied with the dwelling or one of the dwellings

10.10 Apportionment

10.10.1 Qualifying parts of buildings

If you sell or long lease a reconstructed building and only part of it will be used for a qualifying purpose, then you must apportion your charge. This is explained further at section 16.

10.10.2 Mixed sites

If you sell or long lease a development site containing buildings that qualify for zero rating as substantially reconstructed protected buildings (or parts of buildings) and other buildings, you must apportion the liability of your charge between them on a fair and reasonable basis.

11. Supplies of building materials by contractors

11.1 Goods supplied ‘over the counter’

If you’re a retailer, a builder’s merchant, or supplying goods from stock, you must standard rate most goods that you sell.

There are some exceptions such as the supply of protective boots and helmets for industrial use (read Protective equipment (VAT Notice 701/23)) and printed manuals (read Zero rating books and printed matter (VAT Notice 701/10)).

For an overview of those goods that can be supplied at the zero or reduced rate read VAT guide (VAT Notice 700).

The VAT treatment of goods supplied in connection with certain building services supplied to disabled people or to charities serving the needs of such people is explained in Reliefs from VAT for disabled and older people (VAT Notice 701/7).

11.2 Goods ‘incorporated’ by a builder

If you’re a builder, the rate of VAT you charge for your work normally determines the rate of VAT you charge on any goods you ‘incorporate’ in the building or its site (read paragraph 13.3) ― whilst carrying out that work. If your work is zero-rated or reduced-rated, then so are the goods.

This is only the case where the goods that you’re incorporating into the building are ‘building materials’. For an explanation of what goods are ‘building materials’ read section 13.

If the goods are not ‘building materials’, you must charge VAT at the standard rate on the supply of those goods.

If you’re working on a zero-rated project, you can still zero rate the service of incorporating standard-rated goods in the building. But if you’re working on a reduced-rated project, you cannot reduced-rated the incorporation of standard-rated goods that are not building materials. You must standard rate both elements of your charge.

If the goods are ‘building materials’ and the liability of your service of incorporating the goods in the building is:

• zero-rated then the liability of the goods is zero-rated
• reduced-rated then the liability of the goods is reduced-rated
• standard-rated then the liability of the goods is standard-rated

If the goods are not ‘building materials’ and the liability of your service of incorporating the goods in the building is:

• zero-rated then the liability of the goods is standard-rated
• standard-rated then the liability of the goods is standard-rated

11.3 Input tax

If you’re a contractor, you can deduct input tax on both goods that are ‘building materials’ and goods that are not ‘building materials’ provided they relate to taxable (that is, standard-rated, reduced rate or zero-rated) supplies that you make.

12. Developers ― building materials and other goods

12.1 Liability of goods you sell to the purchaser of a zero-rated property

You will need to know if the goods are ‘incorporated’ in the building (or its site). This is explained at paragraph 13.3.

Goods that are incorporated in a zero-rated building (or part of a building) are zero-rated as part of your zero-rated supply of the building. But you may be ‘blocked’ from reclaiming input tax. This is explained further at paragraph 12.2.

Goods that are not incorporated in the building, such as loose furniture, are liable to VAT at the standard-rated. You’re not ‘blocked’ from reclaiming input tax.

12.2 ‘Blocked’ from reclaiming input tax

You can normally deduct input tax on costs that you use, or intend to use, in making taxable (including zero-rated) supplies. But if you intend to make a zero-rated sale or long lease in a building, you cannot deduct input tax on goods that meet both following 2 conditions:

• are ‘incorporated’ in the building or its site (read paragraph 13.3)
• would not be zero-rated to you if a VAT-registered builder were to construct that building from scratch for you (read paragraph 11.2)

Typically, this means that you cannot reclaim input tax on items such as carpets, most fitted furniture, and most ‘incorporated’ gas and electrical appliances.

You’re not blocked from deducting input tax when the following conditions are met:

• goods ‘incorporated’ in the building that would be zero-rated to you if a VAT-registered builder were to construct that building from scratch for you(read paragraph 11.2)
• goods that are not ‘incorporated’ in the building (or its site)
• ‘incorporation’ services that have been correctly charged with VAT

12.3 Show houses

On new housing developments one or more of the houses are often used temporarily for promotion purposes as show houses. But the ultimate intention of the developer is normally to make a zero-rated sale or long lease in them.

Here you’re ‘blocked’ from deducting input tax on goods that are not ‘building materials’ in the same way as for other houses.

12.4 Removing and disposing of goods on which input tax has been blocked

If you remove the goods from a property to which ‘blocking’ applies and sell them independently (for example, the carpet may need replacing or your customer may prefer a different model appliance), you’re still ‘blocked’ from deducting input tax on both the original item and any replacement. Your disposal of the original item is exempt from VAT.

13. The VAT meaning of ‘building materials’

13.1 The importance of ‘building materials’

If you’re a contractor supplying zero-rated or reduced-rated services described in this notice, the ‘building materials’ you supply with those services and ‘incorporate’ in the building (or its site) will also be zero-rated or reduced-rated. Other articles are normally standard-rated (read section 11).

If you’re a developer, you may be ‘blocked’ from deducting input tax on goods that cannot be zero-rated to you. There are also other implications for supplies you may make. For more detail about developers building materials and other goods in section 12.

13.2 Definition of building materials

For VAT purposes, ‘building materials’ are articles that meet all of the following conditions:

1. The articles are ‘incorporated’ in the building (or its site) (paragraph 13.3).
2. The articles are ‘ordinarily’ incorporated by builders in that type of building (paragraph 13.4).
3. Other than kitchen furniture, the articles are not finished or prefabricated furniture, or materials for the construction of fitted furniture (paragraph 13.5).
4. With certain exceptions, the articles are not electrical or gas appliances (paragraph 13.6).
5. The articles are not carpets or carpeting material (paragraph 13.7).

13.3 The meaning of ‘incorporated’

An article is ‘incorporated’ in a building (or its site) when it’s fixed in such a way that its fixing or removal would either:

• require the use of tools
• result in either the need for remedial work to the fabric of the building (or its site), or substantial damage to the goods themselves

Examples of articles ‘incorporated’ in a building (or its site) include:

• built-in and fitted furniture (only built-in or fitted kitchen furniture are ‘building materials’ (read paragraph 13.5)
• built-in, wired-in or plumbed-in appliances such as boilers or wired-in storage heaters ( that only certain gas and electrical appliances are ‘building materials’, items such as hobs and ovens are not ― read paragraph 13.6)
• flooring (carpets are not ‘building materials’ (read paragraph 13.7)
• topsoil, trees, shrubs, turf, grass seed and plants (trees, shrubs and plants are only ‘building materials’ in particular circumstances ― read paragraph 3.3.4)

Examples of goods that are not ‘incorporated’ in a building (or its site) include free-standing:

• appliances that are merely plugged in
• furniture such as sofas, tables and chairs, and so on

13.4 The meaning of ‘ordinarily’

An article is ‘ordinarily’ incorporated in a building (or its site) when, in the ordinary course of events, it would normally be incorporated in a building of that generic type, such as a dwelling, church, or school. Generic types of building are not split into sub-categories. So, no distinction is drawn between large detached houses and small terraced houses.

The same approach is taken when determining if the goods themselves are the norm for that type of building. For example, a tap would be regarded as being ‘ordinarily’ incorporated whether it is chromium or gold-plated.

Examples of articles ‘ordinarily’ incorporated in different types of building can be found in paragraph 13.8.

The range of items ‘ordinarily’ incorporated in a building is likely to change over time in line with trends and consumer expectations.

13.5 Furniture

13.5.1 Pieces of furniture that count as building materials

Finished or prefabricated kitchen furniture and materials for the construction of fitted kitchen furniture are building materials for VAT purposes when ordinarily incorporated in a building.

13.5.2 Articles that are not furniture but are building materials

Examples of articles that are not furniture and are building materials for VAT purposes, include:

(a) basic storage facilities formed by becoming part of the fabric of the building, such as airing cupboards and under stair storage cupboards

(b) items that provide storage capacity as an incidental result of their primary function, such as shelves formed as a result of constructing simple box work over pipes, and basin supports which contain a simple cupboard beneath, and

(c) basic wardrobes installed on their own with all the following characteristics:

• the wardrobe encloses a space bordered by the walls, ceiling and floor but units whose design includes, for example, an element to bridge over a bed or create a dressing table are furniture and are not building materials
• the side and back use 3 walls of the room (such as across the end of a wall), or 2 walls and a stub wall, but wardrobes installed in the corner of a room where one side is a closing end panel are furniture and are not building materials
• on opening the wardrobe you should see the walls of the building, these would normally be either bare plaster or painted plaster, wardrobes that contain internal panelling, typically as part of a modular or carcass system, are furniture and are not building materials

The wardrobe should feature no more than a single shelf running the full length of the wardrobe, a rail for hanging clothes and a closing door or doors. Wardrobes with internal divisions, drawers, shoe racks or other features are furniture and are not building materials.

13.5.3 Articles that are furniture but are not building materials

All other finished or prefabricated furniture and materials for the construction of fitted furniture are not building materials for VAT purposes, such as:

• wardrobes (other than those basic wardrobes described at paragraph 13.5.2), including basic wardrobes installed as part of a larger installation of furniture in the room
• elaborate vanity units
• wall units, such as bathroom cabinets
• laboratory work benches
• pews, choir and clergy stalls

13.6 Electrical and gas appliances

Most devices that are powered by electricity or gas are not building materials for VAT purposes, even if they’re required to be incorporated in a building as a requirement of Building Regulations. Electrical and gas appliances are building materials when they’re:

• designed by the manufacturers to heat space or water (this includes cookers which are designed to have a dual purpose to heat the room or the building’s water)
• designed to provide ventilation, air cooling, air purification, or dust extraction
• door entry systems, waste disposal units, or machines for compacting waste, and are used in a building designed as a number of dwellings such as a block of flats
• burglar alarms, fire alarms, fire safety equipment, or devices for summoning aid in an emergency (but not phones or electric gates and barriers)
• lifts or hoists

Appliances powered by other fuels are building materials when they are ordinarily incorporated in the building. For example, solid fuel or oil-fired cookers are building materials.

13.7 Carpets

Carpets, carpet tiles and underlay are not building materials for VAT purposes.

Other forms of flooring or floor covering, such as linoleum, ceramic tiles, parquet and wooden floor systems are building materials.

13.8 Examples of articles ‘ordinarily’ incorporated in a building

Articles accepted as being ‘ordinarily’ incorporated in a building (or its site) are listed in paragraph 13.8.1. This is not a complete list. Remember, these articles are only building materials for VAT purposes when they meet all the conditions in paragraph 13.2.

13.8.1 Dwellings

Articles incorporated into a building are:

• air conditioning
• bathroom accessories, such as fixed towel rails, toilet roll holders, soap dishes
• builders’ hardware
• burglar alarms
• central controls (to the extent that these relate to light, heat or ventilation)
• curtain poles, rails and fitted blinds (not electric ― see paragraph 13.6)
• decorating materials
• doors
• dust extractors and filters (including built-in vacuum cleaners)
• fencing permanently erected around the boundary of the dwelling
• fireplaces and surrounds
• fire alarms and sprinkler systems
• fitted furniture (only fitted kitchen furniture is ‘building materials (read paragraph 13.5))
• flooring materials (but not carpets or carpeting materials’ (read paragraph 13.7))
• gas and electrical appliances when wired-in or plumbed-in (only certain gas and electrical appliances are ‘building materials’ ― read paragraph 13.6)
• guttering
• heating systems (including radiators and controls, ducted warm-air systems, storage heaters and other wired in heating appliances, gas fires, underfloor heating and solar powered heating)
• immersion heaters, boilers, hot and cold water tanks
• kitchen sinks, work surfaces and fitted cupboards
• letter boxes
• lifts and hoists
• light fittings (including chandeliers and outside lights) and intelligent lighting (but not including remote control handsets)
• mirrors
• plumbing installations, including electric showers and ‘in line’ water softeners
• power points (including combination shaver points)
• sanitary ware
• saunas
• shower units
• smoke detectors
• solar panels
• solid fuel cookers and oil-fired boilers
• swimming pools inside the house, including water heaters and filters but not diving boards and other specialist equipment
• touch pads (to the extent that these relate to light, heat or ventilation)
• turf, topsoil, grass seed, plants and trees (trees, shrubs and plants are only ‘building materials in particular circumstances (read paragraph 3.3.4))
• TV aerials and satellite dishes
• ventilation equipment (including cooker hoods)
• warden call systems
• window frames and glazing
• wind and water turbines
• wiring (including power circuits and computer, phone and TV cabling)

13.8.2 Buildings used for a relevant residential purpose

These buildings may include all of the articles in paragraph 13.8.1 and in addition can include:

• mirrors
• safes
• external lighting systems

13.8.3 Buildings used for a relevant charitable purpose

The buildings can include:

• blinds and shutters
• external lighting systems
• mirrors
• safes

13.8.4 Schools

For more information read paragraph 13.8.3 but in addition:

• blackboards or whiteboards fixed to or forming part of the wall
• gymnasium wall bars
• notice and display boards
• mirrors and barres (in ballet schools)

13.8.5 Churches

For more information read paragraph 13.8.3 but in addition:

• altars
• church bells
• fonts
• lecterns
• pipe organs
• pulpits

13.9 Examples of articles not ordinarily incorporated in dwellings

Examples of articles are:

• aga and similar range cookers (unless they are solid fuel, oil-fired or designed to heat space or water)
• free-standing and integrated appliances such as cookers, fridges, freezers, dishwashers, microwaves, washing machines
• dryers, coffee machines
• audio equipment (including remote controls)
• built-in speakers
• satellite and freeview boxes
• CCTV
• phones
• electrical components for garage doors and gates (including remote controls)
• bedroom furniture
• bathroom furniture (for example, vanity units, free-standing units)
• curtains, electrical blinds, carpets
• garden furniture, ornaments and sheds

Cookers cannot be considered to be ‘space heaters’ just because they incidentally radiate heat while operating. To be classified as ‘designed to heat space or water, they must be fitted to a heating module or boiler.

14. An explanation of dwellings, ‘relevant residential purpose’ and ‘relevant charitable purpose’

14.1 Relevance of this section

The zero-rated and reduced-rated supplies described in this notice are limited to supplies involving certain types of dwellings, ‘relevant residential purpose’ buildings and ‘relevant charitable purpose’ buildings.

This section explains the meaning of the terms used in the rest of this notice. Section 15 explains what to do if only part of the building is qualifying accommodation.

14.2 The meaning of ‘designed as a dwelling or number of dwellings’

14.2.1 The definition

A building is ‘designed as a dwelling or number of dwellings’ where the building contains a dwelling or more than one dwelling and in relation to each dwelling the following conditions are satisfied:

• the dwelling consists of self-contained living accommodation
• there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling
• the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision
• the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision
• statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent

If in doubt as to whether these conditions are satisfied, further information can be found in the VAT Construction Manual.

14.2.2 When this definition is used

This definition applies when zero rating the:

• construction of new buildings (read section 3)
• sale of, or long lease in, new buildings (read section 4)
• sale of, or long lease in, non-residential buildings (read section 5)
• conversion of non-residential buildings for relevant housing associations (read section 6)

14.2.3 Occupancy restriction

An occupancy restriction is a prohibition on separate use or disposal, read paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

14.3 The meaning of ‘designed to remain as or become a dwelling or number of dwellings’

14.3.1 The definition

A building is ‘designed to remain as or become a dwelling or number of dwellings’ where the building contains a dwelling or more than one dwelling and, in relation to each dwelling, all of the following conditions are satisfied:

• the dwelling consists of self-contained living accommodation
• there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling
• the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision
• the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision

If in doubt as to whether these conditions are satisfied, find more information in the VAT Construction Manual.

14.3.2 When the definition is used

The definition applies when zero rating:

• approved alterations to protected buildings (read section 9)
• the sale of, or long lease in, substantially reconstructed protected buildings (read section 10)

14.3.3 Occupancy restriction

An occupancy restriction is a prohibition on separate use or disposal, read paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

14.4 The meaning of single household dwelling

14.4.1 The definition of ‘single household dwelling’

It’s a dwelling that meets all of the following conditions:

• is designed for occupation by a single household either as a result of having been originally constructed for that purpose (and has not been subsequently adapted for occupation of any other kind), or as a result of adaptation
• consists of self-contained living accommodation
• has no provision for direct internal access to any other dwelling or part of a dwelling
• is not prohibited from separate use by the terms of any covenant, statutory planning consent or similar provision
• is not prohibited from separate disposal by the terms of any covenant, statutory planning consent or similar provision

If in doubt as to whether these conditions are satisfied, further information is available in the VAT Construction Manual.

14.4.2 When the definition is used

The definition applies when reduced rating the:

• conversion of premises (read section 7)
• renovation or alteration of empty residential premises (read section 8)

14.4.3 Occupancy restriction

An occupancy restriction is a prohibition on separate use or disposal, read paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

14.5 The meaning of multiple occupancy dwelling

14.5.1 The definition of a ‘house in multiple occupation’

A ‘house in multiple occupation’ is a dwelling that meets all of the following conditions:

• is designed for occupation by persons not forming a single household either as a result of having been originally constructed for that purpose (and has not been subsequently adapted for occupation of any other kind), or as a result of adaptation
• is not to any extent used for a relevant residential purpose (read paragraph 14.6)
• consists of self-contained living accommodation
• has no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling
• is not prohibited from separate use by the terms of any covenant, statutory planning consent or similar provision
• is not prohibited from separate disposal by the terms of any covenant, statutory planning consent or similar provision

If in doubt as to whether these conditions are satisfied, you can find further information in the VAT Construction Manual.

14.5.2 When the definition is used

The definition applies when reduced rating the:

• conversion of premises (read section 7)
• renovation or alteration of empty residential premises (read section 8)

14.5.3 Occupancy restriction

An occupancy restriction is a prohibition on separate use or disposal, read paragraph 14.2.1.

The occupancy restriction will be found in the planning consent and will prevent the building from being used separately from another building or from being sold (or otherwise disposed of) separately from another building.

But if all it does is restrict the occupancy of a building to a certain type of person such as persons working in agriculture or forestry, or persons over a specified age, then the restriction will not apply.

If in doubt, the appropriate planning authorities should be consulted.

14.5.4 Meaning of multiple occupancy dwelling

A multiple occupancy dwelling is normally a dwelling where an occupant will have some personal space and facilities (such as a bedroom or a bedsit) and will share other facilities with other occupants. Examples of such dwellings are a block of bedsits or a cluster flat.

Multiple occupancy dwellings do not include:

• single household dwellings with accommodation for au pairs, family guests or ‘live-in’ lodgers
• hotels, guest houses, and similar establishments providing accommodation for holiday makers, travellers and similar temporary guests

14.6 The meaning of relevant residential purpose

14.6.1 The definition

‘Relevant residential purpose’ means use as:

(a) a home or other institution providing residential accommodation for children

(b) a home or other institution providing residential accommodation with personal care for people due to old age, disablement, past or present dependence on alcohol or drugs, or past or present mental disorder (read paragraph 14.6.6)

(c) a hospice (as long as that hospice provides some residential accommodation, such as beds for patients)

(d) residential accommodation for students or school pupils

(e) residential accommodation for members of any of the armed forces

(f) a monastery, nunnery or similar establishment

(g) an institution which is the sole or main residence of at least 90% of its residents but not used as a:

• hospital or similar institution
• prison or similar institution
• hotel, inn or similar establishment

14.6.2 When the definition applies

The definition is when:

• zero rating the construction of new buildings (read section 3)
• zero rating the sale of, or long lease in, new buildings (read section 4)
• zero rating the sale of, or long lease in, converted non-residential buildings (read section 5)
• zero rating the conversion of non-residential buildings for relevant housing associations (read section 6)
• reduced rating the conversion of premises (read section 7)
• reduced rating the renovation or alteration of empty residential premises (read section 8)
• zero rating approved alterations to protected buildings (read section 9)
• zero rating the sale of, or long lease in, substantially reconstructed protected buildings (read section 10)

14.6.3 The meaning of ‘home’ and ‘institution’

The terms ‘home’ and ‘institution’ apply to categories (a), (b) and (g) in paragraph 14.6.1.

It’s often important to know whether the building is, itself, used as a ‘home’ or ‘institution’. For example, a bedroom block constructed in the grounds of a registered care home cannot be zero-rated as the construction of a building intended for use solely for a relevant residential purpose because it’s not, in itself, a ‘home’ or ‘institution’ but part of a larger ‘home’ or ‘institution’.

There are some exceptions, explained in the relevant sections, when a group of buildings can be considered together. For example, a number of buildings constructed at the same time on the same site that are intended to be used together as a unit solely for a relevant residential purpose can be zero-rated (read section 3).

To determine if a building (or group of buildings) is intended to be used as a ‘home’ or ‘institution’, all relevant factors need to be considered including:

• the use to which the building will be put
• whether the building will be used in conjunction with other buildings nearby
• whether there will be common ownership, financial control, management or administration
• how the intended use of the building is promoted in advertising
• how the intended use of the building is licensed by any controlling authority

14.6.4 The meaning of residential accommodation

The term ‘residential accommodation’ applies to categories (a), (b), (d) and (e) in paragraph 14.6.1.

By ‘residential accommodation’ we mean lodging, sleeping or overnight accommodation. For example, accommodation for students attending a residential training course is ‘residential accommodation’.

If you wish to establish whether accommodation is accepted by HMRC as of a type provided to students, you should establish whether the persons are recognised as falling into the category of ‘student’.

A building containing living accommodation is not ‘residential accommodation’ unless the building contains sleeping accommodation. For example, if the only living accommodation in a building is a dining hall, then that’s not ‘residential accommodation’.

But a dining hall that’s to be constructed at the same time as another building (or buildings) containing sleeping accommodation with the intention that they’re to be used together to provide living accommodation, is ‘residential accommodation’.

If a building contains both bedrooms and a dining hall, then both parts are ‘residential accommodation’.

But the dining hall must be intended for use in conjunction with the sleeping accommodation in that building. Use by persons sleeping in other buildings prevents the dining hall from being ‘residential accommodation’ unless all the buildings involved were constructed together and were intended to be used collectively as living accommodation.

To fall within the zero rate, all of the buildings must be intended to be used together solely (95% or more) by residents living in the accommodation, their guests and those who look after the building

14.6.5 Withdrawal of concession for dining rooms and kitchens

There was an informal concession that allowed dining rooms and kitchens to be zero-rated as residential accommodation for students and school pupils if they were used ‘predominantly’ by the live in students, this was not included in this Notice after 1995.

The rules for applying the concession were that the dining room or kitchen must be owned by the educational establishment and not a third party.

The dining hall concession allowed the construction of dining halls to be zero-rated if constructed at the same time as student accommodation and if residents in that student accommodation made up at least 50% of the users of the dining hall.

This concession was formally withdrawn on 1 April 2015.

14.6.6 The meaning of personal care

The term ‘personal care’ applies to category (b) in paragraph 14.6.1.

By ‘personal care’, we mean assistance with washing, eating and so on, but can also include such medical treatment as is necessary to contain a condition or to assist towards a person’s rehabilitation.

14.7 The meaning of relevant charitable purpose

14.7.1 The definition

It means use by a charity in either or both of the following ways:

• otherwise than in the course or furtherance of business (read paragraph 14.7.3)
• as a village hall or similarly in providing social or recreational facilities for a local community (read paragraph 14.7.4)

Charities are non-profit distributing bodies established to advance education, advance religion, relieve poverty sickness or infirmity or carry out certain other activities beneficial to the community.

For construction purposes, a charity must meet the criteria set out in paragraph 2.1 of How VAT affects charities (VAT Notice 701/1).

The charity must be recognised by HMRC and, where required, registered with the appropriate regulator.

If a charity is not currently recognised by HMRC, they can apply for recognition online.

Suppliers must take reasonable steps to check that their customer holds appropriate charitable status. Charities claiming zero rating can demonstrate that they have charitable status with their Charity Commission registration number or with HMRC’s letter confirming charitable status (the letter has the code CTY001 at the bottom).

Organisations that are not registered with a regulator or recognised by HMRC can apply to HMRC for recognition.

Community amateur sports clubs (CASCs) do not hold charitable status. Whilst they may be entitled to certain tax reliefs, unlike charities there are no specific VAT reliefs for CASCs. An organisation is recognised as a CASC by HMRC with a letter showing CTY24 at the bottom left-hand corner.

14.7.2 When the definition is used

The definition applies when zero rating:

• the construction of new buildings (read section 3)
• the sale of, or long lease in, new buildings (read section 4)
• approved alterations to protected building (read section 9)
• the sale of, or long lease in, substantially reconstructed protected buildings (read section 10)

14.7.3 The meaning of business

Information on what is meant by ‘business’ can be found in VAT guide (VAT Notice 700), How VAT affects charities (VAT Notice 701/1) and Education and vocational training (VAT Notice 701/30).

Remember, activities that do not make a profit, or activities where any profit is only used to further the aims and objectives of the charity, can still be business activities.

Buildings typically seen as not being used for business purposes include:

• places of worship
• offices used by charities for administering non-business activity, such as the collection of donations
• school buildings where no fee is charged for the provision of education
• research buildings where the research is grant funded
• scout and guide huts that are used purely for scouting and guiding activities (if the huts are let out for local community activities they can be seen as similar to village halls)

Buildings typically seen as being used for business purposes:

• membership organisations where the organisation charges a membership fee
• school buildings where a fee is charged for the provision of education
• offices used by charities for administering business activities, such as fund-raising events where an entrance fee is charged
• village halls and similar buildings

14.7.4 Village halls and similar buildings

A building falls within this category when all of the following apply:

• constructed and managed by a charity
• operated on a non-commercial basis for the benefit of a local community as a village hall or similar
• used solely to provide social or recreational facilities for a local community

Constructed and managed by a charity

Charities must meet the criteria set out in paragraph 2.1 of How VAT affects charities (VAT Notice 701/1).

The charities body must run and administer the management of the building, read paragraph 2.1 of How VAT affects charities (VAT Notice 701/1).

If these criteria are not met, then construction of a village hall cannot be at the zero rate.

Community amateur sports clubs (CASCs) do not hold charitable status as they cannot meet the requirements to be a charity for VAT purposes set out in paragraph 2.1 of How VAT affects charities (VAT Notice 701/1). Buildings constructed and managed by CASCs will be liable to the standard rate of VAT on the construction of a village hall.

Operated on a non-commercial basis for the benefit of a local community

For the construction of the building to qualify for a zero rate of VAT, the building must be used as a village hall or similar. The building most also run on a non-commercial basis.

This means that charges for spaces, rooms, facilities, or any other services in the building are modest. Any profit generated from running of the building should be nominal or relatively low (meaning not on a commercial scale). All profits should feed back into the operations of the village hall or the local community.

In deciding whether a building is a village hall or similar, the aim of the building must be solely for the benefit of the local community, not only a particular group.

Key features that we expect to see included is that the building is:

• operated on a ‘not for business’ or ‘not for profit’ basis, with nominal profits put back into facilities of the village hall or the local community
• used for social or recreational activities
• used by a significant number of diverse community groups
• used in a multi-purpose manner
• hired out on a first come, first serve basis, including its facilities

Further features include:

• the charities aim is to operate the building for the local community (not a particular group), which forms part of the charity’s articles of association
• the charity to have an appropriation dissolution clause to make sure the building goes to another qualifying body

These features will depend on the individual facts of each case, as some may not be relevant.

Users of the building are not limited to the local community but can come from further afield.

Used solely to provide social or recreational facilities for a local community

A building is used solely as a village hall or similar, where at least 95 per cent of the building must be used for social or recreational activities.

Examples of typical buildings used as a village hall or similar when all other conditions in section ‘Village halls and similar buildings’ are met:

• sports pavilions
• church halls
• community centres
• community sports centres

Examples of buildings that are not used as a village hall or similar are:

• buildings designed or used mainly for storage, such as for sports equipment, as these are not used for social and recreational activities
• mixed-use buildings, where part of the building cannot be used for a variety of social or recreational activities
• CASCs constructing and managing the building

15. Relevant residential purpose accommodation that’s designed as dwellings

15.1 Residential purpose buildings also treated as dwellings

For the vast majority of buildings potentially eligible for zero rating, you will know from the outset whether you’re constructing or purchasing a new building that is designed as a dwelling or is intended to be used solely for a relevant residential purpose (RRP).

But since the zero rate for dwellings is based on the design of the building and for relevant residential purposes based upon its use, HMRC accepts that there may be instances where a building could qualify for zero rating under both of these provisions at the same time.

In such cases, a taxpayer is free to rely on either provision to achieve zero rating for their building.

For example, if a building is intended to be used solely for a relevant residential purpose but also meets all the conditions of note 2 to group 5 of schedule 8 of the VAT Act 1994 (in that it takes the form of a building designed as a dwelling or number of dwellings), each taxpayer is free to rely on either note for zero rating. This can give flexibility as to how a building is used.

This also means that the planning permission does not necessarily determine the VAT treatment. In this example, the planning permission is for student accommodation and that is how the developer is using the building but, the building also meets the conditions of a building designed as a dwelling and so can also rely on note 2 for its zero rating.

15.2 Types of development affected

Developments are zero-rated if they meet the conditions of note 2 to group 5 of schedule 8 of the VAT Act 1994 (a building designed as a dwelling or a number of dwellings) or note 4 of group 5 to schedule 8 of the VAT Act 1994 (a building intended for use solely for a relevant residential purpose).

15.3 Note 2

Note 2 is a design test which requires that in order for a building to be ‘designed as a dwelling or a number of dwellings’ it must meet 4 conditions:

15.3.1 The dwelling must consist of self-contained living accommodation

We consider that the dwelling must have the basic elements of living and so would expect there to be a kitchen, bathroom, sleeping area and living area.

At the minimum, we would expect 2 rooms, one a bathroom and the other providing an area that had facilities for living, cooking and sleeping (for example, a studio flat). You can read more on this in the VAT Construction Manual.

In the case of a studio flat we would expect, at the very least, to see in the living or sleeping room, an area that could be used for the purpose of food preparation and so will usually include a sink, storage for cups and utensils and so on, worktop, space for a fridge and means of cooking (for example, a cooker, hob or oven).

If no cooking appliance is installed, we expect there to be an appropriate connection for such an appliance (for example, cooker ring, main circuit or gas pipe designed for connecting to a cooker or similar built-in appliances). A general plug socket only, perhaps intended for the use of a microwave oven, kettle or toaster is unlikely to be sufficient unless most of the other features of a kitchen are also present.

It can also include what are sometimes termed ‘cluster flats’. These are single flats (in this instance, have their own front door) and will typically contain a number of en-suite bedrooms let to individual students. Within the cluster flat will also be a kitchen and common area to be used by all occupants of that flat.

15.3.2 There’s no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling

There’s no direct internal access when you cannot move from one dwelling to another dwelling or part of a dwelling, without first moving across an area outside the dwelling, such as a landing or corridor. But if there’s a fire door connecting one dwelling to another, we would not see this door as failing this condition.

But we would expect the door to be fitted with an appropriate fire door lock and must be intended to be secured at all times other than in the event of a fire or fire test. If the door is capable of being routinely opened to allow occupants to move freely from one dwelling to another, we would see this as failing this condition.

15.3.3 The separate use or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision

Separate use or disposal means that the use or disposal of the dwelling must not be tied to another building, structure or even land. If it’s tied it fails this condition.

Accordingly, the condition will normally exclude ‘granny’ annexes constructed in the grounds of a main house and where a dwelling cannot be used or sold separately from other premises — for example, a caretaker’s house at a school or assisted living units within the grounds of care or nursing homes. You can read more on this in the VAT Construction Manual.

In the example of a development like student accommodation where the dwellings take the form of studio or cluster flats, we would expect that there are no conditions or prohibitions under the terms of the planning consent that prevents individual flats from being sold or leased.

But this condition is still met if any prohibition on the sale of individual flats arises as a result of a financial agreement (for example, terms of mortgage or finance of the property) or from agreements to let the accommodation to students at a particular university or other educational body.

15.3.4 Statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent

To meet this condition, the dwelling that meets conditions (a) to (c) must have been granted planning permission and have been constructed or converted in accordance with that consent. This will be a matter of fact in each case. But variations to the planning consent, resulting in a change in appearance, or to the composition or distribution of the accommodation, will normally be accepted.

More radical departures resulting, for example, in a much larger dwelling being constructed, will fail to satisfy the condition, unless there is evidence that the planning authorities have decided not to pursue the matter. You can read more on this in the VAT Construction Manual.

15.4 Note 4

Note 4 is a use-based test that requires a building to be intended for use solely for a relevant residential purpose by falling into one of 7 categories listed in paragraph 14.6.1.

A change of use charge can arise where a building or part of a building has been zero-rated on the basis that it is intended to be used solely for a relevant residential purpose. It applies if, within a 10-year period, the building is used for another purpose or the entire interest in it is sold.

If any of these events occurs you, as the person who received the zero-rated supply, will be liable to account for VAT on a self-supply. This means that you may need to account for output tax on the building or part of the building that was originally zero-rated, subject to an adjustment to reflect the period of time it was used for a relevant use.

More information on the change of use provisions is in section 19.

Use solely for a relevant charitable purpose (read section 17) does not count as a change of use.

Different rules apply where the building was completed before 1 March 2011 (read paragraph 19.2).

1) The enlargement or extension of an existing building is zero-rated to the extent it creates an additional dwelling or dwellings (read paragraph 3.2.4). This does not apply in other cases where the enlargement or extension is intended to be used solely for a relevant residential purpose.

2) Some residential conversions are reduced-rated (read section 7). For example, a reconfiguration of the premises is reduced-rated if it creates a different number of dwellings (read paragraph 7.3) but not if it creates a different number of units in a building or part of a building intended solely for a relevant residential purpose.

3) Under note 4, construction services are only zero-rated or reduced-rated when supplied to a person who intends to use the building solely for a qualifying purpose. Therefore, subcontractors cannot make use of the certificate and must standard rate their supply. But if the building is designed as dwellings, and is not being considered under note 4, supplies by subcontractors are zero-rated or reduced rate in the same way as for a main contractor (read paragraph 2.1.3).

15.5 Additional facilities

Some student accommodation and other residential developments may sometimes include facilities such as a dining hall or laundry in a separate building.

Note 5 of group 5 to schedule 8 of the VAT Act 1994 allows such buildings to be zero-rated where they’re constructed at the same time as the residential accommodation and are intended to be used with it. To fall within the zero rate, all of the buildings must be intended to be used together solely (95% or more) by residents living in the accommodation, their guests and those who look after the building.

Assuming the student accommodation was eligible to be zero-rated under both notes 2 and 4, the construction of the dining hall or laundry could only be zero-rated under note 5 if the building was eligible to be zero-rated under note 4.

15.6 Change of use charge

If, within 10 years of practical completion, a building intended to be used for a relevant residential purpose is put to a non-relevant use or disposed of, a self-supply charge may become due (read section 19).

For example, a block of student accommodation which on its own would be eligible for zero rating under both note 2 and note 4 has been constructed together with a separate dining hall or laundry (for use solely for the occupants, their guests and staff who look after the building), which could only be zero-rated under notes 4 and 5.

If a change of use charge arises, no VAT would be chargeable on the student block as this would have been eligible for zero rating as a dwelling at the time of construction.

But a self-supply VAT charge would arise for the separate dining hall or laundry which could never have qualified for zero rating as dwellings under note 2.

15.7 Accommodation provided as part of a care package

Would a building that could be zero-rated under both note 2 and note 4 still be zero-rated under note 2 if care is also provided?

The test for note 2 is whether the building meets all the requirements set out in that note. Note 2 does not refer to intended use so zero rating will apply provided that all the requirements are met. In the event that it’s intended that a care package would be provided, this should not make any difference.

But in order for the test in note 2(c) to be satisfied, the separate use or disposal of the dwelling must not be ‘prohibited by the terms of any covenant, statutory planning consent or similar provision’ so the provision of a care package may prevent the building from meeting this condition.

Where accommodation is provided as the grant of a major interest together with an extensive 24 hour, 7 days a week care package, we would generally see 2 separate supplies, but where the accommodation is rented, or is subject to short lets, the liability will be determined by what is supplied and how it is held out.

For example, if the supply is for accommodation and a set care package all for one rate or price, this is indicative of a single supply. But the provision of accommodation, together with care as and when required by the resident, indicates that separate supplies are being made.

It’s difficult to cover all cases as the liability will be determined by the supply position. But, unless there’s a major interest granted there can be no zero rating at all, irrespective of the level and nature of care provided.

15.8 Contractors and subcontractors

The VAT liability of supplies made by sub-contractors is dependent upon whether or not the building will be built relying on note 2 (building designed as a dwelling) or note 4 (relevant residential purpose building). In the case of note 2, the subcontractors supplies will be zero-rated and under note 4, standard-rated for VAT.

Where the contractor is constructing a building for a client that’s eligible to be built under note 2 or note 4, we expect the contractor to determine the liability of their supplies and those of any subcontractors based upon the actions of the client.

If the client gives a VAT certificate, then the building will be built under note 4 and the subcontractors supplies will be standard-rated. If no certificate is given, then the subcontractors supplies are zero-rated.

Once the client takes possession of the completed building, they’re still free to rely on note 2 or note 4 for any supplies they make. Since the building was correctly constructed at the time (either under note 2 or note 4) there’s no requirement for the contractor or subcontractors to amend the VAT treatment of their supplies if say, the building was built under note 4 and the client subsequently relies on note 2 for supplies they make of the completed building or vice versa.

Where a contractor is constructing a building eligible to be zero-rated under note 2 or note 4 but there is no client, then the contractor is free to determine whether they’re building dwellings or a relevant residential purpose building.

Again, if the building is built relying on note 4 but is subsequently supplied on relying on note 2, there is no requirement to revisit the liability of the supplies made by the subcontractors.

16. Apportionment for part qualifying buildings

16.1 The apportionment rules

Where only part of a building consists of qualifying accommodation (such as a building consisting of shops with flats above), your supply (which may be building work or the sale or lease in the property) must be zero-rated or reduced-rated to the extent that it relates to the qualifying parts.

If your supply only relates to the qualifying parts of the building, then you charge VAT at the zero rate or reduced rate as appropriate.

Similarly, if your supply only relates to the non-qualifying parts of the building then you cannot zero rate or reduced rate your charge.

If your supply relates in part to qualifying parts of the building and in part to non-qualifying parts, you can only zero rate or reduced rate your supply to the extent that it relates to the qualifying parts. A fair and reasonable apportionment should be made.

16.2 Roofs, foundations and other building services that supply the whole building

Building work that relates to the fabric of the building affecting both qualifying and non-qualifying parts of the building must be apportioned, such as work to:

• roofs
• foundations
• lifts
• building services that supply the whole building, such as wiring and plumbing

16.3 Communal areas in blocks of flats

Typically, blocks of flats consist of individual dwellings and areas for the use of all residents, such as a lounge, laundry and refuse area and, occasionally, gym, pool and leisure facilities. The first sale of each flat is zero-rated, and the buyer also acquires a right to use the communal areas.

Where the communal areas are only used by residents and their guests, we accept that the construction of the whole building is zero-rated. Where the communal areas are partly used by others, then the construction of the communal areas is standard-rated.

16.4 Live-work units

A live-work unit is a property that combines, within a single unit, a dwelling and commercial or industrial working space as a requirement or condition of planning permission.

Zero rating or reduced rating is only available to the extent that the unit comprises the dwelling, provided that the dwelling meets the normal conditions outlined in paragraphs 14.2 to 14.5.

Dwellings that contain a home office are not live-work units and no apportionment is needed.

16.4.1 Working out the extent of the dwelling

Units where the work area is shown as a discrete area of floor space, in an office or workshop, must be apportioned to reflect the presence of the commercial element.

Where planning permission requires that a minimum amount of the unit (for example 20%) must be used for commercial or industrial purposes, the remaining amount (that is 80%) can be treated as being the dwelling element for VAT purposes.

But it may be treated for VAT purposes as if it were entirely a dwelling and no apportionment is required where a unit has neither:

• an area that must, as a requirement or condition of planning permission, be used for commercial or industrial purposes
• planning permission requiring a certain percentage of the floor space to be used for commercial or industrial purposes

16.4.2 Liability of commercial or industrial areas that are treated as part of the dwelling

If the commercial or industrial areas are treated as if they’re part of the dwelling, read paragraph 16.4.1, then the following rules apply to the whole unit:

• construction or conversion services, your supplies are zero-rated or reduced-rated, subject to the normal rules explained in this notice
• sales and long leases ― your supplies are zero-rated, subject to the normal rules explained in this notice
• short leases ― your supply is exempt from VAT

16.4.3 Liability of commercial or industrial areas that are not treated as part of the dwelling

If the commercial or industrial areas are not treated as part of the dwelling, then the following rules apply to those parts:

• construction or conversion services ― standard rate your supply
• freehold sales where the building is less than 3 years old ― standard rate your supply
• freehold sales where the building is at least 3 years old, your supply is exempt from VAT
• leases ― your supply is exempt from VAT

If you have sold the building as a transfer of a going concern, the transaction may be outside the scope of VAT. Further information can be found in Transfer a business as a going concern (VAT Notice 700/9).

Further information on exempting the sale and lease of buildings and opting to tax is in Land and property (VAT Notice 742) and Opting to tax land and buildings (VAT Notice 742A).

The rules in paragraph 16.4.2 apply to the dwelling part of the building.

16.5 Relevant residential purpose buildings

If you’re making a supply in connection with a building intended for use as residential accommodation for students (read paragraph 14.6.4) or school pupils, or residential accommodation for members of any of the armed forces you can only zero rate or reduced rate your supply to the extent that it relates to the ‘residential accommodation’.

If you’re making a supply in connection with a building intended for use as a home or other institution, zero rating or reduced rating is not restricted to the residential accommodation but can extend to other areas within the buildings such as administration offices, leisure or educational facilities.

17. Certificates for qualifying buildings

17.1 Holding a certificate if you’re a contractor or developer

You need to hold, within your business records, a valid certificate when you make any zero-rated:

• or reduced-rated supply in connection with a building that will be used solely for a ‘relevant residential purpose’ (read paragraph 14.6)
• supply in connection with a building that will be used solely for a ‘relevant charitable purpose’ (read paragraph 14.7)

There’s no requirement to hold a certificate for zero-rated or reduced-rated supplies in connection with buildings that will be used as one of the types of dwelling described at paragraphs 14.2 to 14.5.

17.2 Automatically zero rating or reduced rating your supply on receipt of a valid certificate if you’re a contractor or developer

Possession of a valid certificate does not mean that you can automatically zero rate or reduce rate your charge. The certificate merely confirms that the building is intended to be used solely for a qualifying purpose. You must meet all of the conditions explained in the relevant sections of this notice to zero rate or reduce rate your supply.

17.3 Automatically accepting a certificate as being valid if you’re a contractor or developer

You must also take all reasonable steps to check the validity of the certificate. If this includes corresponding with your customer to confirm the details of the use of the building, you should retain such correspondence within your records.

If you have taken all reasonable steps to check the validity of the certificate and acted in good faith, you will not normally be asked to account for VAT if the certificate is subsequently found to have been issued in error. The wording of this concession is reproduced in VAT Notice 48: Extra Statutory Concessions (Concession 3.11).

17.4 Subcontractors accepting certificates

If you’re a contractor working to a main contractor, you should not be issued with a certificate. You must always standard rate your supply when working on a certificated building.

17.5 Issuing certificates

The customer for the zero-rated or reduced-rated work issues the certificate. The certificates at section 18 can be used, or the issuer can create their own certificate provided it contains the same information and declaration.

17.6 Customer issuing a certificate

If you’re a customer, you must issue your certificate before your supplier makes their supply. But HMRC will allow your supplier to adjust their VAT charge on receipt of a belated certificate provided that both of the following conditions are met:

• you can demonstrate to them that at the time they made their supply, you had an intention that the building will be used in the way being certified
• all other conditions for zero rating or reduced rating are met

Your supplier cannot make an adjustment with HMRC if they’re restricted from doing so under the 4 year ‘capping’ rules (read How to correct VAT errors and make adjustments or claims (VAT Notice 700/45)).

17.7 Which certificate to issue

The 2 available certificates confirm that you’re either eligible to receive:

• zero-rated or reduced-rated building work (the certificate can be found at paragraph 18.1)
• a zero-rated sale or long lease (the certificate can be found at paragraph 18.2)

You should issue whichever certificate is appropriate.

17.8 Penalties for issuing incorrect certificates

If you issue an incorrect certificate, you may be liable to a penalty equivalent to the amount of VAT not charged. A penalty is not VAT and, if you’re registered for VAT, you will not be able to recover it as input tax.

A penalty will not be issued, or will be withdrawn, if you can demonstrate that there’s a reasonable excuse for issuing the incorrect certificate.

17.9 What you’re certifying when you issue a certificate

17.9.1 Building work

If you’re obtaining building work, your declaration will confirm to your supplier one of the following:

a) For the purpose of zero rating or reduced rating, as the recipient of construction services, that you intend to use the building, or part of the building for a qualifying process that is:

• solely for a ‘relevant residential purpose’
• solely for a ‘relevant charitable purpose’
• a combination of the 2

b) For the purpose of reduced rating that, as the recipient of the works of residential renovations and alterations that the building is to be used (although not necessarily by you) for a qualifying process that is:

• solely for a ‘relevant residential purpose’
• solely for a ‘relevant charitable purpose’
• a combination of the 2

For example, a charity A has a building constructed, part of which the charity will occupy and use solely for a qualifying purpose. The charity will sub-let the remaining part to another charity B, who will occupy and use the part solely for a qualifying purpose.

As the building is intended to be used solely for a qualifying purpose, charity A can issue a certificate to its building contractor and have the supplies of construction services (and associated materials) zero-rated.

But if an investment company has a residential care home built and leases the property to an operating company who will run the care home, the investment company cannot issue a certificate to its building contractor as it’s not occupying the building and using it for a qualifying purpose.

17.9.2 Sales and long leases

If you’re buying a building, or a long lease in a building, your declaration confirms to your supplier that the building, or the part of the building, on which you’re seeking zero rating is intended to be used solely for a qualifying purpose that is:

• solely for a ‘relevant residential purpose’
• solely for a ‘relevant charitable purpose’
• a combination of the 2

That use need not be necessarily by you alone, it can be in conjunction with tenants of yours.

For example, a charity A enters into a 99-year lease with the developer for a building, part of which the charity will occupy and use solely for a qualifying purpose. The charity will sub-let the remaining part to another charity B, who will occupy and use the part solely for a qualifying purpose.

As the building is intended to be used solely for a qualifying purpose, charity A can issue a certificate to the developer and have first grant of a major interest zero-rated.

Similarly, if an investment company purchases the freehold of a residential care home from a developer and leases the property to an operating company who will run the care home, the investment company can issue a certificate to the developer and have the sale of the freehold zero-rated.

17.10 The meaning of ‘use’

Normally, when considering, for VAT purposes, how an item is used, HMRC will look to the economic use to which that item is put as determinative. But, for the purposes of the zero and reduced rates for qualifying buildings, it’s the occupational use of the building that determines the correct VAT treatment.

17.11 Sole use

A building (or part) is not used ‘solely’ for a qualifying purpose when it’s:

• used at the same time for other purposes
• used at a different time for other purposes
• never used for a qualifying purpose

But you can ignore up to 5% non-qualifying use.

17.11.1 How to calculate the percentage of non-qualifying use

Any calculation method can be used to demonstrate 95% or more qualifying use provided it produces a fair result. We consider a result to be fair if the method used:

• accurately reflects the extent to which the building (or part, if appropriate) is intended for use for a qualifying purpose
• and its application is not unduly burdensome, and its accuracy can be checked relatively easily

Examples of calculation methods can be found in the VAT Construction Manual.

18. The certificates

It is the recipient of the supply that is required to complete the certificates and pass the certificate to the contractor or developer so they can zero-rate or reduce rate the VAT on their supplies in connection with the qualifying building. There are 2 types of qualifying buildings:

1. Relevant residential purpose buildings (read paragraph 14.6).
2. Relevant charitable purpose buildings (read paragraph 14.7).

Relevant charitable purpose buildings do not qualify for any reduced rate of VAT. The reduced rate of VAT only applies to qualifying residential properties — for full conditions read sections 7 and 8 of this notice.

18.1 Zero-rated and reduced-rated building work

This certificate has force of law under note 12 group 5 schedule 8 of the VAT Act 1994.

Zero-rated and reduced-rated building work certificate

ODT, 11.4 KB

This file is in an OpenDocument format

18.2 Zero-rated sales and long leases

This certificate has force of law under note 12 group 5 schedule 8 of the VAT Act 1994.

Zero rated sales and long leases certificate

ODT, 11.5 KB

This file is in an OpenDocument format

19. Changing the use of certificated buildings

19.1 VAT implications of changing the use of a certificated building

If you have obtained zero rating for the construction or acquisition of a building (or part of a building) because you certified that it would be used solely for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, we expect that the building will be used solely for either or both of those qualifying purposes for a period of, at least, 10 years following completion of the building.

If the building ceases to be used solely for either or both of those qualifying purposes within that 10-year period, if that use decreases or if the building is disposed of, a taxable charge comes about, on which you must account for VAT.

There are 2 sets of rules that govern how this taxable charge comes about and how it’s calculated. One set of rules applies to buildings completed before 1 March 2011. The other set of rules applies to buildings completed on or after 1 March 2011.

Both these sets of rules only apply if you have met the following conditions:

• received a supply in connection with a certificated building that was zero-rated under the rules in sections 3 to 6.
• not relied on Extra Statutory Concession 3.29 (the ‘90%’ concession ― withdrawn 1 July 2010) to disregard minor non-qualifying use in buildings intended for use solely for a relevant charitable purpose

These sets of rules do not apply to if you have received a supply in connection with a certificated building that was zero-rated under the rules in sections 9 and 10.

These sets of rules do not apply if the building is demolished to ground level within 10 years of completion.

19.2 Buildings completed before 1 March 2011

19.2.1 Taxable charge

A taxable charge arises when, within 10 years of completion of the building, you either:

• sell or lease the building (or part) and the building (or part) is no longer intended for use solely for either or both of the qualifying purposes
• change your own use of the building (or part) so that it’s no longer used solely for either or both of the qualifying purposes

19.2.2 Completion

Completion takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

• when a Certificate of Completion is issued
• the accordance to approved plans and specifications
• the scope of the planning consent and variations to it
• whether the building is habitable or fit for purpose

19.2.3 Calculating the taxable charge

If you sell or lease the building (or part), the charge is based on the value of the sale or lease that relates to those parts of the building that originally benefited from zero rating. VAT is calculated at the standard rate current at the time of the sale or lease.

If you change your own use of the building (or part), the charge is based on the value of the original zero-rated supply relating to the building (or part). VAT is calculated at the standard rate current at the time of that zero-rated supply.

You do not make adjustments for changes in the market value of the property. You can make an adjustment on a pro rata basis for the years (if any) when you used the building solely for either or both of the qualifying purposes.

Number of complete years before the change in use	VAT charge (as a percentage of the the VAT that should have been charged)
0	100%
1	90%
2	80%
3	70%
4	60%
5	50%
6	40%
7	30%
8	20%
9	10%
10 or more	0%

Example

A charity paid £1 million for a new building. The building was intended to be used by the charity solely for a non-business purpose so the charity did not incur £175,000 VAT (the standard rate of VAT being 17.5% at the time).

After 2 and a half years (2 complete years), the charity changed its use of the building to a business purpose.

VAT due on original supply had it not been zero-rated = £175,000

VAT due to HMRC = £175,000 × 80% = £140,000

19.2.4 Accounting for VAT

If you sell or lease the building (or part), the VAT charged on your supply is declared as output tax on your VAT Return for the VAT period in which the supply takes place.

If you change your own use of the building (or part), the tax charge that comes about is a self-supply charge. You declare the VAT calculated as output tax (as if you had made a supply) on your VAT Return for the VAT period in which the change in use occurs. You can then treat this VAT as deductible input tax to the extent that it relates to any other taxable supplies that you make.

You may need to make subsequent adjustments to the amount of tax that you deduct if both the following conditions apply:

• taxable charge is £250,000 or more
• building is used to make exempt supplies

Further information on input tax adjustments can be found in Capital Goods Scheme (VAT Notice 706/2).

19.2.5 Accounting for VAT if you are not registered for VAT

If you are not registered for VAT, you may have become liable to be registered for VAT because of these taxable charges.

Further information on registration can be found in Who should register for VAT (VAT Notice 700/1).

If you do not become liable for registration, you are not required to account for the VAT charges calculated.

19.3 Buildings completed on or after 1 March 2011

19.3.1 Taxable charge

A taxable charge arises when, within 10 years of completion of the building, you:

• sell the building, regardless of whether it continues to be used solely for either or both of the qualifying purposes or not
• lease the building (or part) to another person who does not intend to use the building (or part) solely for either or both of the qualifying purposes
• change your own use of the building (or part) so that it’s no longer used solely for either or both of the qualifying purposes
• change your own use of the building (or part) so that the use for either or both of the qualifying purposes decreases

19.3.2 Completion

Completion takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

• when a Certificate of Completion is issued
• the accordance to approved plans and specifications
• the scope of the planning consent and variations to it
• whether the building is habitable or fit for purpose

19.3.3 Calculating the taxable charge

In all the circumstances where a taxable charge arises, the charge is based on the value that will yield an amount of VAT that is equal to the VAT that would have been charged had the building (or part) not qualified for the zero rate. That value is adjusted according to the:

• extent that the building is affected by the change in use
• number of complete months that the building (or part) has been used solely for either or both of the qualifying purposes, VAT is calculated at the standard rate current at the time of the original zero-rated supply (or supplies)

VAT is calculated at the standard rate current at the time of the ‘change in use’ or disposal.

A taxable charge can arise more than once in the 10 years immediately following completion. For example, in the third year following completion, the use of a building for a qualifying purpose decreases from 100% to 75%. Two years later, there’s a further decrease from 75% to 50%. Each decrease will require a taxable charge to be calculated.

Examples of calculating the taxable charge

Example 1

A charity constructs or acquires a new building at the zero rate of VAT because they have certified that they intend use the building solely for a non-business purpose. The value of the zero-rated supply was £5 million. The standard rate of VAT at the time of supply was 20%. The building consists of 5 floors.

During the first 5 years, the building was used as intended. After 5 years, the charity decides that they will use the top floor of the building for a business purpose.

VAT of £100,000 on a self-supply charge will need to be accounted for. That has been calculated as follows:

• value of the supply or supplies that would have yielded £1 million VAT = £5 million
• proportion of the building affected by the change = 1 floor out of 5 that is, 20%
• number of months remaining in the 10-year period that this part of the building will not be used as intended = 60 months out of 120 that is, 50%
• the standard rate of VAT at the time of the ‘change in use’ is 20%

Therefore the value of self-supply = £5 million × 20% × 50% = £500,000.

VAT at 20% = £500,000 × 20% = £100,000

Example 2

A charity constructs or acquires a new building at the zero rate of VAT because they have certified that they intend to use the building solely for a non-business purpose. The value of the zero-rated supply was £5 million. The building consists of 5 floors.

During the first 5 years, the building was used as intended but at the end of the fifth year, the charity sold its entire interest in the building. VAT of £500,000 will need to be accounted for on a self-supply charge, calculated as follows:

• value of the supply or supplies that would have yielded £1 million VAT = £5 million
• proportion of the building affected by the change = 100%
• number of months remaining in the 10-year period that this part of the building will not be used for a relevant charitable purpose = 60 months out of 120
• the standard rate of VAT at the time of the disposal = 20%
• Value of self-supply = £5 million × 100% × (60 divided by 120) = £2.5 million
• VAT @ 20% = £500,000

Had the standard rate of VAT at the time of the original zero-rated supply not been 20%, the value of the self-supply would have to be adjusted.

Examples of this adjustment and further examples of the ‘change in use’ calculation can be found in the VAT Construction Manual.

19.3.4 Accounting for VAT

The tax charge that comes about is a self-supply charge. You declare the VAT calculated as output tax (as if you had made a supply) on your VAT Return for the VAT period in which the change in use occurs. You can then treat this VAT as deductible input tax to the extent that it relates to any other taxable supplies that you make.

You may need to make subsequent adjustments to the amount of tax that you deduct if both the following conditions are met:

• taxable charge is £250,000 or more
• building is used to make exempt supplies

Further information on input tax adjustments can be found in Capital Goods Scheme (VAT Notice 706/2).

Where the taxable charge arises because the building has been sold, the seller, as well as accounting for a self-supply charge based on the original zero-rated supply, will also have to account for the actual supply that is, the disposal of its freehold or leasehold interest in the building.

19.3.5 Accounting for VAT if you’re not registered for VAT

If you’re not registered for VAT, you may have become liable to be registered for VAT because of these taxable charges.

Further information on registration can be found in Who should register for VAT (VAT Notice 700/1).

If you do not become liable for registration, you are not required to account for the VAT charges calculated.

20. Zero rating the development of residential caravan parks

20.1 The basic conditions

Civil engineering work necessary for the development of permanent parks for residential caravans is zero-rated. Your services can be zero-rated when all of the following conditions are met:

1. A permanent park for residential caravans is developed (read paragraph 20.2).
2. You carry out civil engineering work that is necessary for the development of the park (read paragraph 20.3).
3. Your services are not specifically excluded from zero rating (read paragraph 20.4).

You cannot zero rate work that’s not civil engineering work, such as the construction of:

• indoor swimming pools
• social centres
• shops
• fitness clubs
• a doctor’s surgery
• a manager’s house (although the work may be zero-rated under the rules in section 3)

20.2 The definition of a ‘residential caravan’

The park being developed must only be for residential caravans.

A residential caravan is one in which residence throughout the year is not prevented by the terms of a covenant, statutory planning consent or similar permission. The development of a holiday park of fixed caravans, or parks for touring caravans, is, therefore, normally standard-rated.

20.3 Civil engineering work being necessary for the development of the park

Examples of zero-rated civil engineering work include:

• laying new pitches or bases for the caravans
• laying new roads, drives, parking bays and paths
• installing water, electricity and gas supplies
• installing drainage and sewerage

Works that are unnecessary (and are standard-rated) include the construction of:

• playgrounds
• hard landscaping

20.4 Services excluded from zero rating

20.4.1 Alterations to existing works

You cannot zero rate the reconstruction, alteration or improvement of an existing work, such as widening or upgrading an existing road.

20.4.2 Architects, surveyors, consultants and supervisors

The separate supply of architectural, surveying, consultancy and supervisory services is always standard-rated.

For an explanation of when a separate standard-rated supply takes place under different types of building contract read paragraph 3.4.1.

20.4.3 Goods on hire

Goods hired on their own are always standard-rated. Examples of standard-rated hire are given in paragraph 3.4.2.

20.4.4 Goods put to a temporary private use

If goods that belong to your business are put to a temporary private use outside of the business (such as if you use plant and equipment at home or lend them to a friend), then you’re making a taxable supply of services. For more information read VAT guide (VAT Notice 700). Such supplies are not zero-rated under the rules in this section.

20.5 Apportionment

20.5.1 Apportionment for alterations to existing works

Works of reconstruction, alteration or improvement are standard-rated, for more detail read paragraph 20.4.1. If you’re supplying both zero-rated and standard-rated civil engineering work you must apportion your supply to reflect the differing liabilities.

20.5.2 Apportionment for mixed site developments

Where a service is supplied in part in relation to necessary civil engineering work and in part for other purposes, an apportionment may be made to determine the extent to which the supply is treated as being zero-rated.

If you decide not to make an apportionment then none of your work can be zero-rated.

21. Place of supply of construction services and working overseas

21.1 The place of supply

The place of supply of services directly related to land or property is where the land itself is located, irrespective of where you or your customer belongs. Place of supply of services (VAT Notice 741A) provides examples of services that are, and are not, directly related to land and property. You should also refer to this notice for detailed guidance on the place of supply of construction and other land-related services.

21.2 Work carried out in the UK

If the place of supply of your construction services is the UK (including the Isle of Man but not the Channel Islands) then your supplies are within the scope of UK VAT and you may need to register and account for VAT. For an explanation of when and how you should register for VAT in the UK read Who should register for VAT (VAT Notice 700/1).

21.3 Work carried out outside of the UK

If the place of supply of your construction services is outside the UK then your supplies are outside the scope of UK VAT and you do not charge UK VAT to your customer. Your supplies may be subject to VAT in the country where your services are supplied and you may be liable to register and account for VAT there. You should contact the VAT authorities in the country concerned for guidance.

22. Value of supply ― deductions and liquidated damages

22.1 Income Tax deductions

If Income Tax is deducted from payments you receive under the Construction Industry Scheme, the value of your supply is the gross amount before Income Tax is deducted.

22.2 Construction Industry Training Board (CITB) levies

Any levy payable to the CITB ‘sticks’ with the contractor and under the regulations is not passed on in full or in part to the subcontractors.

Where a contractor and subcontractor agree a price for the subcontractor’s supplies, then the value for VAT purposes will be the agreed price, even if the contractor withholds part of the payment as a contribution towards the ‘levy’. The full agreed price should be the amount shown on the invoice and VAT will be due on that amount.

Where a contractor pays the full amount, but then asks the subcontractor to make a contribution towards the ‘levy’. That contribution will be outside the scope of VAT. It will not be a reduction in consideration. Only if the parties renegotiate the price and reduce the value of the supply, by the ‘levy’ amount, will it be a reduction in consideration.

22.3 Liquidated damages

Liquidated damages are agreed pre-estimated sums to be paid in the event of a breach of contract by one of the parties. The amount is either a set figure or determined by a formula.

If you receive liquidated damages, you’re not receiving payment for a supply by you and no VAT is due on that amount.

If you’re due to make a payment for liquidated damages and due to receive from the other party a payment for a supply made by you, you cannot reduce the value of your supply (and therefore cannot reduce the amount of VAT chargeable) even if you set the amounts off against each other.

23. Tax points, authenticated receipts and self-billing

23.1 Time of supply (tax points)

23.1.1 Single payment contracts

Single payment contracts are subject to the normal tax point rules.

If you supply services, the basic tax point is the date when the service is performed. If you issue a VAT invoice or receive a payment before that basic tax point, the actual tax point for the amount you invoice or receive is the date you issue the invoice or receive the payment, whichever happens first.

If you issue a VAT invoice up to 14 days after the basic tax point, the actual tax point is the date that you issue the invoice. If you issue a VAT invoice more than 14 days after the basic tax point, the actual tax point can be either the basic tax point or it can be the date that you issue the invoice.

Further information on tax points can be found in VAT guide (VAT Notice 700).

23.1.2 Retention payments

Retention clauses allow the customer to hold back a proportion of the contract price once the work has been completed, pending confirmation that the supplier has done the work properly and has rectified any immediate faults that might be found.

Under the normal tax point rules, which apply to single payment contracts (read paragraph 23.1.1) you would be required to account for VAT on any outstanding retention payments at the basic tax point. But there are special rules that apply to retention payments generally. The tax point for the retention element of the contract is delayed until you either receive the retention payment or issue a VAT invoice for it, whichever occurs first.

23.1.3 Contracts that provide for periodic payments

If, under a contract that provides for periodic payments (often referred to as stage payments or interim payments), you make supplies of services:

• including supplies made by architects, surveyors, consultants or those acting in a supervisory capacity
• together with goods

In the course of the construction, alteration, demolition, repair or maintenance of a building or of any civil engineering work, the tax point for your supply is the earlier of receipt of payment or the issue of a VAT invoice.

There’s no basic tax point when the work is completed unless the contract is covered by the special anti-avoidance rules that can apply in some cases. Further information on these rules can be found in section 24.

23.1.4 Self-billing and authenticated receipts

The tax point rules for self-billed invoices and supplies made under the authenticated receipt procedure are explained at Self-billing (VAT Notice 700/62) and paragraph 23.2 respectively.

23.2 Self-billing

Under a self-billing arrangement, the customer makes out VAT invoices on behalf of the VAT-registered supplier (for example, a main contractor makes out VAT invoices on behalf of their registered subcontractor) and sends a copy of the invoice to the supplier with the payment. Further information on self-billing can be found in Self-billing (VAT Notice 700/62).

23.3 Operating self-billing

You can only issue self-billed invoices to your suppliers if both the following conditions are met:

• they have agreed to this method of accounting
• you can meet all the conditions in Self-billing (VAT Notice 700/62)

You do not need to seek our authorisation to operate self-billing.

23.4 Authenticated receipts

23.4.1 The procedure

The authenticated receipt procedure must not be confused with self-billing (read paragraph 23.2). An authenticated receipt is not a VAT invoice. The procedure allows a supplier to authenticate a receipt for payment and removes the requirement to issue a normal VAT invoice.

You must not use the authenticated receipt procedure when you make a supply under a single payment contract.

The procedure works by customers preparing receipts for supplies they receive and forwarding them to their suppliers with payment. The receipts are only valid for VAT purposes when the supplier has authenticated them. The time limits for the issue of an authenticated receipt are the same as for VAT invoices (read VAT guide (VAT Notice 700)). Failure to provide an authenticated receipt is an offence.

The procedure can only be used when all of the following conditions are met:

• the customer and the supplier mutually agree to operate the procedure
• services, or services together with goods, are supplied in the course of the construction, alteration, demolition, repair or maintenance of a building or of any civil engineering work
• the contract provides for payments for such services to be made periodically, or from time to time
• the receipt contains all the particulars required on a VAT invoice
• no VAT invoice or similar document is issued

23.4.2 The tax point of an authenticated receipt

The issue of an authenticated receipt does not create a tax point in the same way that a VAT invoice does. If you make a supply under a contract providing for periodic payments, the tax point is the date you receive payment or, where the special anti-avoidance rules described in section 24 apply, the date you complete the work.

23.4.3 Recovering input tax on a supply made under the authenticated receipt procedure

An authenticated receipt is acceptable as evidence for input tax purposes.

You may claim input tax in the tax period in which your supplier receives the stage payment without waiting for an authenticated receipt, but you must obtain and keep a copy of it. Suppliers cannot authenticate a receipt and return it to the customer until they have received the payment.

If you experience difficulty in obtaining an authenticated receipt from a supplier, you should contact HMRC on the third successive occasion that you are unable to obtain one. A claim to input tax may still be allowed if satisfactory alternative evidence is available, or you can show that reasonable efforts were made to secure an authenticated receipt and the claim is otherwise correct.

24. Tax points ― the special anti-avoidance rule

This section explains the special tax point rule for construction services (and construction services together with goods) that are supplied in the course of the construction, alteration, demolition, repair or maintenance of a building or civil engineering work and that are made under a contract that provides for periodic payments.

24.1 The special anti-avoidance rule

Under the normal rule for contracts that provide for periodic payments (read paragraph 23.1.3) the tax point for your supply is the earlier of receipt of payment or the issue of a VAT invoice.

If a VAT invoice is not issued, the tax point (and therefore VAT payment) can be delayed. The special anti-avoidance rule counters the VAT effect of contracts where payment does not become due for many years after the completion of the work.

24.2 Scope of this section

You do not need to read this section if:

• the people who will be occupying the building or civil engineering work will be doing so ‘wholly or mainly’ for eligible purposes (read paragraph 24.7)
• you’re unconnected with the proposed occupiers and you’re sure that neither you nor any of your subcontractors are receiving any form of finance from the proposed occupiers, nor anyone connected with them, in this connection, finance does not include interim payments for your supplies, on which VAT is accounted for

If this section does not apply to you, you should follow the normal tax point rules explained in section 23.

24.3 The special anti-avoidance rule

If the anti-avoidance rule applies, you will have to account for VAT no later than when you complete your work. To help explain when the anti-avoidance rule applies follow these steps:

Step 1 ― Do you know who will occupy the building or civil engineering work? (read paragraph 24.4)

If ‘yes’, follow step 3

If ‘no’, follow step 2

Step 2 ― Do any of your subcontractors know who will occupy the building or civil engineering work? (read paragraph 24.4 and 24.8)

If ‘yes’, follow step 4

If ‘no’, you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22

Step 3 ― Will you, or someone connected with you, occupy the building or civil engineering work? (read paragraphs 24.4 and 24.5)

If ‘yes’, follow step 7

If ‘no’, follow step 4

Step 4 ― Will one of your subcontractors, or someone connected with one of your subcontractors, occupy the building or civil engineering work? (read paragraphs 24.4, 24.5 and 24.8)

If ‘yes’, follow step 7

If ‘no’, follow step 5

Step 5.Will someone who gave you finance to pay for the costs of your work, or someone connected with your financer, occupy the building or civil engineering work? (read paragraphs 24.4 to 24.6)

If ‘yes’, follow step 7

If ‘no’, follow step 6

Step 6 ― Will someone who gave your subcontractor finance to pay the costs of their work, or someone connected with their financer, occupy the building or civil engineering work? (read paragraphs 24.4 to 24.6 and 24.8)

If ‘yes’, follow step 7

If ‘no’, you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22

Step 7 ― Will the person occupying the building or civil engineering work be doing so wholly or mainly for eligible purposes? (read paragraph 24.7)

If ‘yes’, you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22

If ‘no’, you must account for VAT no later than when you complete your work (read paragraphs 24.9 and 24.10)

24.4 Occupation of the building or civil engineering work

A business occupies a building or civil engineering work if its employees work there, or if it uses the building for storing its stock or other assets.

If, when you have completed making your supplies, you genuinely do not know who the intended occupier of the building or civil engineering work is, you do not have to account for VAT on completion unless your subcontractor has to account for VAT when they complete.

24.5 Connected persons

The following people are treated as connected:

• your husband, wife or civil partner
• your relatives and their husbands, wives or civil partners
• your husband’s, wife’s or civil partner’s relatives and their husbands, wives or civil partners
• business in a partnership, your partners and their husbands, wives, civil partners and relatives
• a company that you control, either by yourself or with any of the persons listed
• the trustees of a settlement of which you’re a settlor, or of which a person who’s still alive and who’s connected with you is a settlor

Relative means a brother, sister, ancestor or lineal descendant. It does not include nephews, nieces, uncles and aunts.

A company is connected with another company if:

• the same person has control of both, or a person has control of one and persons connected with them (or they and persons connected with them) have control of the other
• a group of 2 or more persons have control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom they are connected

24.5.1 Exceptions to the normal ‘connected persons’ rule

For the purpose of the anti-avoidance rules, a company is not treated as ‘connected’ to another company as a result of both being under the control of:

• the Crown
• a Minister of the Crown
• a government department
• a Northern Ireland department

24.6 Meaning of ‘financing’

Financing can include:

• loans from banks or elsewhere
• if you’re a sole proprietor or partnership, private funds you may put into your business
• if you’re a company, shares you may issue
• whatever the legal structure of your business, financing from your trade creditors

In addition, there are more unusual forms of finance covered by the anti-avoidance rule. A person provides finance to you, for example, if they:

• arrange for others to provide finance to you
• pay your debts for you, or arrange for others to do so
• provide a guarantee or security for a loan you have taken out

24.7 The meaning of ‘wholly or mainly for eligible purposes’

You are not affected by this anti-avoidance rule if the people who will be occupying the building or civil engineering work will be doing so ‘wholly or mainly for eligible purposes’.

HMRC is of the view that the test is met if the nature of the occupier’s use entitles them to the recovery of, at least, 80% of any input tax incurred in relation to their occupation of the building or civil engineering work.

It’s important to note that the test is whether the occupier of the building or civil engineering work can recover 80% or more of the VAT relating to that building or work. It does not matter whether their overall ability to recover VAT is greater or less than 80%.

24.7.1 Buildings not normally seen as being ‘wholly or mainly for eligible purposes’

These are buildings that are used in the following ways:

• as a bank, or the headquarters of a banking group
• as an insurance broker’s office, or the office of an insurance company
• as a school, college or university
• as an office for a charity (but you do not have to worry about the special anti-avoidance rule if your work for the charity is zero-rated)
• as a private hospital, or the head office of a private healthcare business
• for any purpose if the occupier is not registered for VAT (but you do not have to worry about the special anti-avoidance rule if your work is zero-rated, such as constructing a house)

24.7.2 Buildings normally seen as being ‘wholly or mainly for eligible purposes’

These are buildings that are used in the following ways:

• as the head office of a fully taxable business
• for any purpose if the occupier is a government department within the meaning of section 41 of the Value Added Tax 1994 (if you’re in any doubt about whether the occupier is within that meaning, you should ask them in the first instance, if, after doing so, the position is still unclear then you should consult the VAT: general enquiries helpline)
• by a local authority for carrying out its statutory functions
• as a retail shop (so long as the retailer is registered for VAT)
• as a wholesale outlet (so long as the wholesaler is registered for VAT)
• as a factory or workshop (so long as the manufacturer is registered for VAT)
• as an importer’s office or warehouse (so long as the importer is registered for VAT)
• as a charity shop (so long as the charity shop is registered for VAT)

24.7.3 Public, private partnership or private finance initiative

If a public, private partnership or private finance initiative arrangement relates to a building that will be occupied exclusively by a government department (including an NHS hospital), you do not have to account for VAT when you complete your work and you can follow the normal rules explained in section 22.

But some public, private partnership or private finance initiative arrangements relate to buildings that will be occupied by private sector businesses too. If the private company is connected with the construction contractor (or a subcontractor) or provides finance to the contractor (or subcontractor), either itself or through an associated business, then the construction contract may be caught by the special anti-avoidance rule.

If for any reason your particular structure is caught, you do not need to account for VAT on the full cost of constructing the entire building when you complete your work. You may, instead, account for VAT only on a proportion of the overall price that fairly reflects the part of the building that will be occupied by the private company.

24.8 Your subcontractors

You’re affected by the anti-avoidance rule if your subcontractors are affected by it. If, for example, a bank gives a loan to your subcontractor specifically to do work on one of their banks, your subcontractor would be affected by the anti-avoidance rule, and so would you.

The anti-avoidance rule has to be drafted this way because otherwise there would be an easy way round it for deliberate VAT avoiders. But we will not be looking to catch you out on a technicality in this area, and if it does come to our attention that you’re inadvertently affected by the rule because of your subcontractors, we will look at your case sympathetically.

24.9 Completion of work

‘Completion’ takes place at a given moment in time. That point in time is determined by weighing up the relevant factors of the project, such as:

• when a Certificate of Completion is issued
• in accordance with approved plans and specifications
• the scope of the planning consent and variations to it
• whether the building is habitable or fit for purpose

24.10 The amount of VAT that should be accounted for on completion

24.10.1 Valuation

If you’re caught by the anti-avoidance rule, you must account for VAT on the full value of the contract, less any amounts on which VAT has already become due because you received a payment or issued a VAT invoice. The full value of the contract includes retentions and disputed amounts.

24.10.2 Disputes

Where there’s a dispute, or where it’s not possible to know the exact value of the contract for any other reason, you should make a reasonable estimate of the value. If you’re in dispute with your customer, you do not have to account for VAT on the full amount that you’re claiming from your customer if you feel that you will most likely be forced in the end to settle for a lower amount.

You should account for VAT on your best estimate of the amount that will eventually be agreed. (We recommend that you document the basis of your estimate, so that you can later show that it was reasonable.) Later, when the value of the contract is finalised, you will need to make an adjustment to the VAT paid.

25. Self-supply of construction services

25.1 When to account for a self-supply charge

You’re deemed to be making a supply to yourself (known as a self-supply) and you must account for VAT on those services in your VAT Return for the period in which you complete the work if, for the purpose of your business (or your VAT group’s business), you use your own or your employees’ labour (where the open market value of that labour is £100,000 or more) to:

• construct a building
• extend, alter or construct an annexe to a building such that the works increase the floor area by 10% or more
• construct any civil engineering work

You do not account for a self-supply charge if the work would have been zero-rated.

25.2 Valuation

When valuing the supply you must include demolition work carried out at the same time or in preparation for any of the building work but exclude goods and materials, and services that would be zero-rated if supplied by a VAT-registered person.

25.3 Accounting for VAT

Input tax incurred on goods and services related to the self-supply charge can be deducted in full, subject to the normal rules.

When you become liable to account for the self-supply charge, you must declare output tax (as if you had made a supply). You can then deduct this as input tax (as if you had made the supply to yourself) to the extent that it relates to any other taxable supplies you make.

If the value of the self-supply is £250,000 or more you may, if the building is used to make exempt supplies, need to make subsequent adjustments to the amount of input tax you deduct. Further information can be found in Capital Goods Scheme (VAT Notice 706/2).

25.4 VAT registration

If you are not registered for VAT, the value of the self-supply will make you liable for registration. You must notify HMRC of your liability to register when you know the work will be completed within the next 30 days. You may also register, on a voluntary basis, at an earlier time. Further information on VAT registration can be found in Who should register for VAT (VAT Notice 700/1).

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Published 13 August 2014
Last updated 24 January 2024 + show all updates

1. 24 January 2024

   Sections 18.1 and 18.2 of the notice and the certificates in those sections have been updated to show they have force of law under Note 12 group 5 Schedule 8 of the VAT Act 1994.

2. 23 May 2023

   Sections 13.8.1 and 13.9 have been updated to clarify that electrical blinds are not ordinarily incorporated in dwellings.

3. 20 February 2023

   An error in paragraph 11.2 has been corrected. If the goods are ‘building materials’ and the liability of your service of incorporating the goods in the building is reduced-rated then the liability of the goods is reduced-rated.

4. 24 November 2022

   Amended section 14.7.4 to show the updated conditions where buildings fall into the category of village halls and similar buildings.

5. 10 October 2022

   The overview and section 2 have been updated to include information about the VAT domestic reverse charge. The certificate in section 18.1 has been updated to confirm you’ll need to include the name and address of the organisation receiving the building work.

6. 31 December 2020

   This page has been updated because the Brexit transition period has ended.

7. 18 June 2020

   Information about change of use charges as a result of coronavirus has been added.

8. 17 December 2019

   Section 5.3 has been amended to include relevant criteria for both situations of non-residential conversion.

9. 6 November 2019

   Sections 9.3.1 and 10.3 have been updated to clarify the meaning of a protected building.

10. 13 August 2014

    First published.