Recovering VAT on the construction of residential buildings
The sale (or long lease – more than 21 years) of new residential housing is a zero-rated taxable supply, so normally a business would expect to be able to recover all the VAT connected with the construction and sale of the property.
However, this is not the case; there are some restrictions on what items a business can recover the VAT on.
VAT can be recovered on what HMRC defines as ‘building materials’ that are ordinarily ‘incorporated’ in the building. HMRC gives detailed guidance on what they consider to be building materials in VAT Notice 708 para 13.8.1.
Examples of what HMRC does not consider to be building materials are curtains, carpets, furniture, cookers, hobs, washing machines etc. Built-in, wired-in or plumbed-in appliances (for example – boilers) are considered building materials.
In order to simplify matters, HMRC allows builders to zero-rate the sale of new houses even if they contain items that are not ‘building materials’, rather than apportioning the sale between the zero-rated house and the standard rated items.
In order to prevent the house purchaser from effectively buying many household items VAT-free, HMRC has introduced a ‘block order’ that blocks the recovery of input tax on items that are not building materials ordinarily incorporated in a residential property. Therefore the developer cannot recover the VAT on the fixtures and fittings on which input tax has been blocked, so that the VAT becomes part of the cost of the goods that get passed on to the purchaser.
However, the rules can be complicated and there are areas of confusion! For example, a wardrobe made by fitting doors right across the end of a room or by enclosing two walls of the house and a ‘nib’, which forms the end of the cupboard, is not considered furniture and the VAT is recoverable. On opening the doors, the back and inside walls of the house should be visible. Rear panelling or internal fittings beyond a shelf and a hanging rail, are said to turn the cupboard into furniture, therefore the VAT is not recoverable.
VAT on carpets cannot be reclaimed, however VAT on laminate flooring, linoleum, wood flooring and tiles is recoverable.
On new housing developments one or more of the houses are often used temporarily for promotion purposes as show houses. However, the ultimate intention of the developer is normally to make a zero-rated sale or long lease of them.
Here the developer is ‘blocked’ from deducting input tax on goods that are not ‘building materials’. The same rule applying as it does for other houses.
However, if the developer removes the goods from a property to which ‘blocking’ applied and sells them independently (for example, replacing carpets), the developer is still ‘blocked’ from deducting input tax on both the original item and it’s replacement. Therefore, any sales of blocked items used in a show home are treated as exempt from VAT.
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