Tribunal looks behind the façade of VAT rules on home conversions

A local construction company carried out a major redevelopment of a private house located in a conservation area in Petts Wood, Kent. This involved the demolition of the property - except for its front façade, the front slope of the roof and certain internal walls and features - before building a new, significantly expanded dwelling around what remained of the original house. The house was not a listed building but, as an example of the ‘Tudorbethan’ style of the 1930s, it was of considerable architectural interest. All of the retained elements were required to be kept as a condition of the planning permission.

A dispute arose with HMRC over the correct VAT position of the work undertaken. The builders took the view that their services were eligible for the zero-rate as they were provided in the course of constructing a new home. Their argument was based on an exception in the VAT law which allows a rebuild of a private dwelling to be treated as a completely new building, provided no more than the façade of the original building is retained as a condition of the statutory planning consent. However, HMRC refused zero-rating, deciding that the works were subject to VAT at 20%.

In the appeal that followed, the First-tier Tax Tribunal carefully considered the extent of the works and found that the finished home could not be treated as a zero-rated ‘new build’ for VAT purposes because too much of the original house had been retained.

The tribunal first decided that the front part of the roof of a building is not part of its ‘façade’. In the judge’s view, the façade and the roof are two different structures, made of different materials. They also have different aspects – the façade faces the street, while the roof faces the sky. Despite being visible from the street, the roof does not become a façade, or part of the façade, simply because it can be seen by passers-by or approaching visitors. An observer looking from the front of the house would have said that two things had been retained, the front façade and the roof. Therefore, there was more than just the façade of the old building remaining at the time the construction of the new house began.

That aside, the tribunal went on to note that parts of four internal walls were also kept from the original house, along with a brick-built fireplace and chimney breast. Retention of those elements alone would also have exceeded what was permitted in the VAT law.

However, HMRC did not have everything its own way in this appeal. Having found that the works did not qualify for zero-rating, the tribunal nonetheless went on to decide that the construction work instead qualified for the reduced VAT rate of 5% available for certain conversions of existing residential properties. This was because the owner of the house was able to produce evidence that the property had been empty for more than two years before the works began.

Although the construction company did not win this case outright, the homeowner is likely to be consoled by the finding that only 5% VAT was payable on the project rather than the full 20% HMRC had argued for.

Nevertheless, there are a few ways that this situation might have much been less painful for all those involved.

• VAT on the redevelopment of private homes can be highly complex and, where budgets are tight, underestimating the VAT payable could jeopardise the whole project. It is therefore important for contractors and homeowners to think through the VAT implications as far as possible in advance, and consider if any changes that arise during the construction process might affect the position. It may be appropriate to approach HMRC for a ruling on any particularly contentious points
• In this appeal, HMRC appears to have focused entirely on applying the standard VAT rate to the works and failed to engage with the alternative argument that they were eligible for the reduced VAT rate of 5%. In the end, the tribunal had little difficulty accepting the homeowner’s relatively straightforward arguments and evidence to support this outcome. Had the reduced rate been considered by HMRC at an earlier stage, the matter was unlikely to have needed a tribunal hearing, saving time, money and effort all round.
• Finally, while the tribunal’s decision that the front of the roof is not part of its ‘façade’ is probably correct based on the letter of the law, it leaves us with an outcome that seems to contradict the spirit of the rules. The planning authority is likely to have insisted that both the façade and the front of the roof were retained because both are visible from the street, so both contribute to the appearance of such an architecturally interesting building. The ‘front façade’ exception in the VAT law was presumably created so projects didn’t lose out on the zero-rate solely because of planning authorities’ general desire to maintain the front facing appearance of properties. Tweaking this to permit retention of the front of the roof too would allow VAT and planning objectives to be more closely aligned.