Andrew Needham looks at the importance of obtaining planning permission before starting work on a residential development and a potential VAT trap.
The construction of new residential property is zero-rated, and builders and developers take for granted that the supply of building services in connection with the construction of new residential property is automatically zero-rated.
However, for a building development to be undertaken legally, planning permission must have been obtained.
Planning permission
The construction of new residential property is zero-rated; but if planning permission has not been obtained, HMRC has argued that it is not legally a new residential construction but just the supply of building services, which in lieu of planning permission would be standard-rated.
This point was confirmed by the First-tier Tribunal (FTT) in Williams v HMRC [2017] UKFTT 846 (TC), in which the unfortunate taxpayer had to pay standard-rated VAT on construction services supplied before planning permission had been obtained. Since this decision, HMRC has been taking a close look at the date that planning permission had been granted before allowing zero-rating to apply to the development.
Beware of retrospective planning consent
In Williams, the taxpayer obtained planning permission for an extension to a property which included partial demolition, but after work started it became clear that the whole building would need to be demolished.
Following the complete demolition of the previous dwelling on the site, the contractor commenced the construction of a completely new residential building. However, the existing planning consent only envisaged an extension, and the taxpayer did not at that time have planning permission to construct a new replacement residential building on the site.
The taxpayer’s planning consultant advised that the Town and Country Planning Act 1990 provided for this situation, whereby planning permission for a development could be obtained retrospectively.
Therefore, the taxpayer decided that a new planning application should be made, and the new planning consent would stand in the shoes of the original planning consent. Based on this information, and with the building contractor already on site, it was decided that the building work to construct a new replacement dwelling would commence immediately while a retrospective planning permission application was submitted.
Not so fast…
The contractor’s advisers wrote to HMRC seeking clarification of the correct VAT treatment of building works carried out on behalf of the taxpayer on the property. HMRC considered that zero-rating could only apply from the date the new planning permission was granted and that all works undertaken prior to that date should be subject to VAT at the standard rate.
HMRC maintained that when retrospective planning consent was given, it affected the VAT liability from the date it was issued. As the planning permission was not in existence when construction of the new dwelling was started, the zero-rating could not apply to any services supplied before the date that planning permission was granted. The FTT agreed with HMRC and dismissed the taxpayer's appeal.
It is therefore essential that a contractor confirms that planning permission has been obtained prior to starting any works, or they will be treated as standard-rated rather than zero-rated.
Practical tip
If a business is undertaking a new residential property development, it should make sure it has planning permission before it starts work because, even if it is granted retrospectively, any work undertaken prior to its grant will be standard-rated.
