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Following representations to HMRC on proposed changes to the VAT liability of design and build contracts, the department has agreed they will continue to be zero-rated where the construction itself qualifies for VAT at the zero rate.
If a builder provides zero-rated building services, other professional services provided to the property owner – design and build – has always followed the same VAT liability as the building work.
HMRC recently issued a proposed draft to amend public notice 708 – prompted by the European Court of Justice’s decision in Talacre Beach Caravan Sales Ltd v CCE (Case C-251/05) [2006] STC 1671 – to change this approach so that a builder would have had to split an invoice on a zero-rated job between professional fees and building work, and charge VAT on the former.
Had the change gone ahead, the additional VAT costs would have been largely irrecoverable by the housing association, charity and not-for-profit sectors.
The Revenue will amend the public notice to identify the circumstances in which services of architects, surveyors and similar professional services included within lump sum, design and build contracts may continue to be treated as a composite supply of zero-rated construction services.
Baker Tilly’s Steve Hodgetts welcomed this response from the taxman, saying, ‘As housing associations are responsible for developing more than 50% of new homes in the UK, the additional VAT costs associated with the proposed change in policy would have adversely affected many affordable housing construction programmes..
Likewise, Peter Jenkins technical adviser to the Charity Tax Group, remarked, ‘The proposed change would have substantially increased the VAT cost of many charity construction projects. This is a good example of the generally positive and constructive relationship between HMRC and CTG on key issues facing the sector.’
