In the case of Astral Construction Ltd the Upper Tribunal held that works provided in the course of constructing a large nursing home attached to an existing church could be treated as zero rated construction works despite the fact it was attached to and incorporated the church as an entrance foyer and other facilities for the site. HMRC were originally arguing that the works failed the VAT requirements to be a new building and should be 5% rated as a conversion.
EXISTING CHURCH WITH NEW BUILDING WRAPPED AROUND IT
The VAT legislation says that certain services provided in the course of constructing certain residential and charitable use buildings can be zero rated. The notes in the legislation then provide more detail on the borderline between when a building is new and zero rated or when it is is not new and potentially 20% rated (assuming the 5% VAT rate is not due).
In particular the law says the construction of a building does not include the ‘conversion, reconstruction or alteration of an existing building’. Nor does it include ‘any enlargement of or extension to an existing building’. This note has long been interpreted as suggesting that any pre-existing building must be totally demolished (other than retained facades as referred to below).
The law also goes on to say a building ‘only ceases to be an existing building when: demolished completely to ground level; or the part remaining above ground level consists of no more than a single façade or where a corner site, a double façade [subject to further conditions related to planning]
What the Astral decision confirmed is that if works to an existing building as a matter of fact and impression do not amount to a conversion, reconstruction or alteration to an existing building or an enlargement or extension to that building then perhaps they could be seen as the construction of a new zero rated building even though parts of the existing building are retained.
The separate provision regarding total demolition or retained facades only confirms where an existing building ceases to exist so this does not affect the Astral scenario.
HMRC have not released any revised guidance in the light of this decision yet although they are likely to in the next couple of months. Whatever the content of the HMRC guidance this decision does mean that where major redevelopments are occurring there is another pathway to consider by which zero rating may be achieved.