In a recent case, the First-tier Tribunal had to consider whether the retention of internal features prevented the redevelopment of a listed building from being zero-rated for VAT purposes.
Zero-rated VAT items are goods on which the Government charges VAT, but the rate is currently set to 0.
Exempt items are goods for which there is no VAT paid or charged, but still, need to be recorded on the VAT return.
The First-tier Tribunal held that the redevelopment of a listed building that still retained its internal features did not amount to “substantial reconstruction”. Essentially, what this means is that the redevelopment is exempt from VAT, rather than at zero-rate. As such, the input tax incurred on the redevelopment is irrecoverable.
The facts of Richmond Hill Developments (Jersey) Ltd v HMRC [2021] UKFTT 290 (13 August 2021).
The appellant had converted a listed building from a nursing facility to a purpose-built block of flats but had left the external walls and roofs completely intact. Other internal features, such as the marble entrance, staircase, concrete floor slabs, and the building’s steel frame had also not been touched.
However, the tribunal referred to a case called HM Customs & Excise Commissioners v Zielinski Baker & Partners [2004]. They observed that, if VAT was to be zero-rated, the protection of national heritage is second to the housing objective of the provisions. This means that the zero-rating of newly constructed buildings is subject to strict measures. The tribunal found that the requirement stating: for a building to be zero-rated constructed from listed buildings, only external walls and features are to be retained- had to be applied stringently.
The tribunal accepted that features attached to external walls and necessary for their stability formed part of the walls. However, the floor slabs provided flooring as well as support for the external walls. Similarly, the vertical steel truss supported both the external walls and the floor slabs. Therefore, both the floor slabs and the vertical steels were internal features. The tribunal also found that the features that had been retained were not trivial and accounted for 7% of the floor space.
Unfortunately, there were no similar flats whose sale was treated differently to the provisions and the policy behind the provisions did not extend beyond protecting the exterior of listed buildings.
What does this mean?
Developers who are involved in similar projects will be disappointed by the decision considering that ordinary language would imply that the development is substantial. They may want to seek professional advice in relation to their development projects.
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