Design and build
Following discussions earlier this summer, HMRC indicated that it would continue to accept that the professional services element (e.g. services of architects etc) of qualifying design and build contracts could still be zero rated. The new notice confirms the position but also sets out the conditions for zero rating to apply.
Previously HMRC allowed professional services to be zero rated where they were provided under a zero rated design and build contract, even if the design element was separately identified within the contracts and invoices. However, to qualify for zero rating under HMRC’s revised policy, the services must be part of a single supply, i.e. it must, in the words of the notice, be “clear in the contract that any services of architects, surveyors or others acting as a consultant or in a supervisory capacity are no more than cost components of the contractors supply and are not specifically supplied on to the customer” (see paragraph 3.4.1 of Notice 708).
In practical terms this means that particular care will need to be taken in wording the contract to support the VAT position. If the professional services are not simply ‘cost components’ of the wider supply but, rather, represent an aim in themselves they will be subject to VAT at the standard rate.
A zero rated supply can be made of a partly completed qualifying building, such as a new dwelling. The extent to which the building must be completed is often referred to as having reached ‘golden brick’. The previous draft of the Notice referred to golden brick being achieved when the partly completed building was above foundation level. The revised Notice states that the building must clearly be ‘under construction’ (see paragraph 4.7.4 of Notice 708).
Although this change could be seen to indicate that foundations may be sufficient to achieve golden brick, elsewhere in HMRC’s guidance it continues to refer to work having progressed above foundation level and our experience is that they do not consider foundations to be sufficient to achieve golden brick.
Demolition services can be zero rated where they form part of a building contract, which includes the construction of qualifying buildings. HMRC has now included a requirement that the demolition services must be carried out after planning permission has been granted (see paragraph 3.3.6 of Notice 708).
This change reflects an increased focus by HMRC on planning permission when determining the VAT liability of a supply and therefore an increased importance in ensuring that development teams are aware of the VAT consequences of their plans.
Why is this important?
Although the changes to the Notice could be considered to be minor, if they affect a development then the difference could be between a standard rated and zero rated supply, i.e. 20% of the build cost, which if irrecoverable could make or break a business plan.
A link to the revised Notice is below:
HMRC website - revised Notice
If you would like to discuss how the revised Notice may affect your organisation, please contact John Rippon, Graham McKay, or your normal KPMG contact.