Phased Building Plan Falls Foul of VAT Law

Although VAT as a tax is based on quite tightly worded rules, it certainly has its pitfalls, especially in the property arena.



In a recent case, a university was left facing a large VAT bill when it decided to go ahead with a new building for its chemistry department, to be constructed in two phases.



The first phase was completed in 2004. The second phase was not commenced until 2011, after additional funding had been obtained. The original plan involved the construction of a wall that was easy to remove, allowing the second phase of the construction to be simplified.



The university contended that the second phase of the construction should be zero-rated for VAT, as had been the first phase, being the construction of a building for a relevant charitable purpose. Zero-rating of construction projects is important for universities as they normally cannot recover VAT on the expenses they incur.



However, HM Revenue and Customs rejected this assertion, because the relevant section of the VAT regulations does not provide for zero-rating of ‘any enlargement of, or extension to, an existing building’.



Although the Tribunal accepted that phased construction was in the original plan and that of necessity such developments often need to be undertaken on a piecemeal basis, on the facts there was no doubt that the second phase was an enlargement or extension of an existing building and, accordingly, it could not be zero-rated.