By Sharron Carle, Winslows Tax Partner
Ordinarily the professional services supplied to the owner of a property, such as architects, surveyors, planning consultants are standard rated supplies for the purposes of VAT.
Construction services can be zero rated for the purposes of VAT, where those services relate to the construction of a new building designed and intended to be used as a dwelling and where (see VAT Notice 708 (section 14):
- the dwelling consists of self-contained living accommodation;
- there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
- the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
- the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; and
- statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.
However, there are two circumstances whereby standard rated supplies of professional services can in effect be zero rated.
The first is where the landowner engages a contractor under a design and build contract for a residential dwelling. Under a design and build contract the contractor the completion deliverable (i.e. the service) is the completed building. As part of that deliverable and under the terms of the design and build contact, the contractor may be obliged to ensure the procurement of planning consent is a component of the supply of the completed dwelling. In these circumstances and provided all the conditions for zero rating are met, HMRC accept that there is a single supply of a completed new build dwelling by the contractor to the landowner.
This means that whilst the professionals will still charge VAT at the standard rate on their services to the contractor, the contractor can recover that VAT on the basis that they in turn are making a single zero rated (taxable) supply to the landowner.
A second method is by means of the landowner entering into a two-part contract with a management contractor. The first part deals with the design and planning element (and any pre-construction works) and the second part deals with the management of the build. Similar to a design and build contract, these “two-part” arrangements culminate in the acceptance of a single composite zero rated supply of a new build dwelling if planning is successful. If it is not and no notice to proceed is provided in accordance with the contractual arrangements between the parties – the supplies under the first part are then treated as standard rated supplies because there is never a supply of a completed dwelling.
Failure to properly account for VAT
It is always the supplier’s responsibility to charge and account properly for VAT. Accordingly any delinquency will always be the responsibility of that supplier. HMRC’s hold suppliers accountable for failing to submit correct VAT returns on time and for the correct periods.
Where a company has discovered that it has made an error in its VAT accounting, HMRC expects that steps should be taken to correct those errors as soon as possible. The level of penalties which could apply will depend on:
- whether the error was careless
- whether the error was deliberate
- whether the error has been concealed.
HRMC also have discretion to reduce penalties in circumstances where an unprompted disclosure has been made by the company, rather than the error being discovered by them during an inspection or otherwise.
Lawyers’ Responsibility
Often Property/Construction lawyers will be involved from the outset of a design and build project, dealing with contracts and overseeing the timetable of legal work required to affect the parties’ plans. It’s important to keep VAT in mind and prompt clients to take specialist tax advice at the outset of any project to ensure no costly mistakes are made.
