Andrew Needham looks at circumstances in which input tax on the construction of residential housing is blocked from recovery.
The sale of (or long lease of) new residential housing is a zero-rated taxable supply; so you would think that all the VAT connected with the construction and sale of the property would be recoverable.
However, this is not the case, as there are some restrictions on what items you can recover the VAT on. This is known as ‘the builder’s block’.
Building materials
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.
An article is ‘incorporated’ in a building (or its site) when it is 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 what HMRC does not consider to be building materials are items such as curtains, carpets, furniture, cookers, hobs, washing machines, fridges, freezers, etc. However, built-in, wired-in or plumbed-in appliances such as boilers or wired-in storage heaters are considered building materials and the input tax can be recovered.
Blocking order
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, they have blocked the recovery of VAT on certain materials.
In order to prevent the house purchaser from effectively buying many household items VAT-free, HMRC have introduced a ‘block order’ that blocks the recovery of input tax on items that are not building materials ordinarily incorporated in a residential property. This means that the property 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 gets passed on to the house purchaser.
However, the detailed rules can be complicated and there are some 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 any internal fittings beyond a shelf and a hanging rail are said to turn the cupboard into furniture and, therefore, the VAT is not recoverable.
Although the VAT on carpets cannot be reclaimed, it is permitted to reclaim the VAT on laminate flooring, linoleum, wood flooring, and tiles, which are considered to be building materials.
Show houses
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 the show house.
In this case, the developer is ‘blocked’ from deducting input tax on goods that are not ‘building materials’ in the same way as for other houses.
However, if the developer removes the goods from a property to which ‘blocking’ applied and sells them independently (for example, the carpets may need replacing or the customer may prefer a different model of appliance), the developer is still ‘blocked’ from deducting input tax on both the original item and any replacement.
Any sale of blocked items used in a show home is treated as exempt from VAT.
