Value Added Tax

Value Added Tax

VAT on Conservatories

JOHN PRICE warns of the dangers of misleading VAT notices.

'HERE IS A construction pitfall', I said. 'You market conservatories to buyers of houses being constructed. You reckon not to charge VAT.'

'Surely adding a conservatory to a new house is zero rated as part of the construction of it?', replied the Busy Practitioner.

'Think', I said. 'You are not selling the house, are you?'

'But I am making a supply in the course of its construction — to the buyer of course, not to the developer.'

'But you can only do that once the buyer owns the house — by which time it has been completed!'

'Certainly the developer won't let me on site until the sale is certain but, once the buyer has signed a contract and paid a deposit, I should be able to agree a price and take a deposit too', said the Busy Practitioner. 'Then, once the developer has nearly finished, I can start. Assuming it usually takes a few more weeks before the house is fully certified and the sale can be completed, surely my conservatory normally would be complete or nearly so too?'

'I think you could achieve that but that you usually won't. For a start, the developer will not like you on site for fear that you get in the way or you create health and safety risks.'

'But a builder of conservatories would have technical skills including on health and safety issues plus an insurance policy', retorted the Busy Practitioner.

'Quite, but J M Associates (18624) failed to get on site prior to completion of the sale', I said.

'But surely they had already agreed a deal and taken a deposit?'

'Yes, but the tribunal said that that did not affect the nature of supply.'

'Surely it did. When a tax point is created, you have to know the rate of tax.'

'Well the tribunal said, "We have not been able to find any examples of cases in which the time of supply rules have been read as influencing the nature of the supply".'

'But past advance payments have secured zero rating for work, which was done after the law had made the supply standard rated', said the Busy Practitioner.

'I think the tribunal was trying to highlight the difference between a payment for a supply which is undoubtedly zero rated as at the date of payment and one which could only be zero rated if other conditions were met; in this case, that the work qualify as part of the construction of the house. It held the conservatory to be an alteration or extension because, normally, any work remaining to be done by the developer was only what the tribunal called minor tasks such as internal floor finishes, heating and electrical work and outside landscaping and paving.'

'Surely, the heating and electrical work is fundamental, not minor?'

'Perhaps the tribunal saw as more important the fact that, usually, the sale had been completed, which presumably meant that all necessary certification had been done.'

'So how could JMA have done it right?'

'I think they would have needed to persuade the developer to allow the buyer to modify the contract to say that completion of sale would be after JMA had added the conservatory. As the latter took between six and eight weeks, they would need to achieve an efficient working relationship with the developer so as not to hold up completion significantly. Maybe the deposit with the developer's solicitor should become non-returnable once JMA were allowed on site.

'This case illustrates the practical difficulties for the building industry in getting the rules right, partly because of their complexity and partly because of the inadequate guidance from Customs, which is then not used properly. Counsel for Customs claimed that the current version of Notice 708: Buildings and construction had been issued in July 2002 and that JMA therefore could not rely on the guidance in the earlier version, the officer having visited on 27 September 2002. She was wrong all the way on that!'

'Careful', warned the Busy Practitioner. 'You'll be in trouble with the lawyers!'

'Not on this one! Customs have previously accepted I am right. The date in the Notice is when it was approved for printing but production takes time; 708 was received in my office on 5 September 2002.'

'Okay, but that was before the visit.'

'That is irrelevant unless Customs had provided a copy to that trader!'

'So what is the key date?' asked the Busy Practitioner.

'It is perhaps a month after a trader gets, with a VAT return, the issue of VAT Notes announcing a new notice, or an amendment to an existing one. That would allow the trader time to contact the National Advisory Service and receive a copy. Here, both the visiting officer giving evidence and counsel claimed the notice date as the key.'

'Wasn't that rubbish anyway; the assessment must have related to earlier periods?'

'Yes. Counsel was not thinking straight. Arguably, Customs had misled the trader with what the tribunal itself saw as weak commentary on the law relevant to this case in the current version of the notice, never mind the earlier one. Of course, that is a misdirection point, not a legal argument, but Customs should have considered it properly.

'I have often warned Customs that this howler would occur sooner or later. It has done in the past on several occasions. The ones I know about were revealed in tribunal decisions, at least two of which I subsequently got reversed. I suspect that officers often rely on notice dates in cases in which an assessment is accepted. Come on Customs — train your people properly!'

A St J Price FCA is a VAT consultant in Gloucestershire and author of Value Added Tax in the Tolley's Tax Essentials series, now in its fifth edition. He may be contacted on 01285 851888, fax: 01285 851889, e-mail: asjohnprice@btopenworld.com.

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