The Value Added Tax (Construction of Buildings) Order 1995

Explanatory Note

(This note is not part of the Order)

This Order substitutes Group 5 (Construction of Buildings etc) of Schedule 8 to the Value Added Tax Act 1994. The Group has been revised to bring greater certainty to the law relating to zero-rate relief for the construction of dwellings and buildings used for other relevant residential or charitable purposes; in particular where work is carried out on existing buildings. The major changes are that:

• persons converting non-residential property to create new dwellings or buildings for other relevant residential purposes can now zero-rate the grant of a major interest in the building or a part of the building;

• the construction of a self-contained annex used for a relevant charitable purpose can now be zero-rated, even if there is secondary access to it through an existing building;

• a new provision is introduced for apportionment of supplies of services relating in part to the construction or conversion of a qualifying building and in part to other matters;

• a stricter definition of an existing building is introduced.

Two new items are included in the substituted Group. Item 1(b) allows the grant of a major interest in a dwelling or relevant residential building to be zero-rated where they have been converted from a non-residential building by the person making the grant. Item 3 makes special provision for registered housing associations to receive zero-rated supplies of services in the course of converting non-residential buildings to dwellings or relevant residential buildings. This reflects the special situation of housing associations who are not normally permitted to sell their housing stock and, therefore, would not be able to benefit from the new provision in item 1(b).

The existing item 3 is reproduced, with amendments, as item 4 and provides for the zero-rating of supplies of building materials by a person who is also making zero-rated supplies of construction or conversion services. (The item should be read in conjunction with Notes (22) and (23).)

Item 1 has also been amended to make it clear that zero-rate relief is only available on the first grant of a major interest by the person constructing or converting a building (or its site) within that item. In addition, Note (1) has extended the meaning of “grant” of a major interest, to include the surrender of such an interest.

A new Note (2) defines for the purpose of the Group what is meant by a building designed as a dwelling or a number of dwellings. The existing note (2) is reproduced in a revised and extended form as Note (3). The Note provides for the circumstances in which the construction of, or conversion of a non-residential building to, a building designed as a dwelling includes a garage.

The new Note (5) is introduced to clarify the entitlement to zero-rate relief where a number of buildings are constructed which together constitute a single operating unit which is used for a relevant residential purpose.

Note (7) defines non-residential in relation to buildings or parts of buildings and in sub-paragraph (b) gives a concession whereby a derelict dwelling or a dwelling converted to non-residential use and not used as a dwelling since the inception of Value Added Tax in 1973 can benefit from the relief granted by item 1(b). Notes (8) and (9) make further provision regarding the definition of non-residential buildings.

Note (10) reproduces the existing Note (5) but the necessary amendments to apply the apportionment provisions to conversions. A new apportionment provision is introduced by Note (11). This provides for apportionment where a service is supplied only in part in relation to a qualifying building.

Note (16) is a revision of the existing Note (9) and precludes, with two exceptions, any work carried out to an existing building from being the “construction of a building”. The exceptions are set out in sub-paragraphs (b) and (c) of the Note. Sub-paragraph (b) provides for the zero-rating of an enlargement or extension to a building, but only to the extent such an enlargement or extension creates an additional dwelling or dwellings, and sub-paragraph (c) provides for the zero-rating of the construction of an annexe to an existing building, provided it is intended for use solely for a relevant charitable purpose and satisfies the other conditions set out in Note (17).

Note (18) introduces a new definition of what amounts to an existing building for the purpose of the Group.

Note (21) defines a registered housing association for the purposes of item 3.

Note (22) reproduces, with amendments, the existing Note (12) and defines building materials for the purposes of item 4. Sub-paragraph (c) of the Note extends the list of appliances which may be zero-rated as building materials, both by removing the previous restriction on domestic appliances and by including all forms of ventilation and other specified items. Note (23) confirms that the reference in Note (22) to the incorporation of goods in building includes their installation as fittings.

All other provisions in the substituted Group 5 merely reproduce the existing provisions.