New build: no planning permission no VAT zero-rating

In CMJ (Aberdeen) Ltd v HMRC [2021] TC8140 the First Tier Tribunal (FTT) dismissed an appeal against assesments to standard-rate the supply of a new build dwelling. It could not be zero-rated as it did not have valid planning consent when the construction works commenced.

CMJ (Aberdeen) Ltd (CMJ) was a construction company which built a new property in Scotland and Zero-rated the supply:

• It was indicated that the initial planning application to demolish an existing property and build a New dwelling would be refused.
• CMJ withdrew the application submitting a new one for an extension and a garage which received approval form the local council.
• After verbal discussions with the council CMJ later applied for a building warrant which described the works as ‘Erection of detached 2 storey 9 apartment dwelling with attached double garage’ with the application type listed as ‘Domestic New Build (Other)’.
• Once the property was complete CMJ applied for a completion certificate and retrospective planning consent. This was granted. The completion certificate was issued first and a few weeks later the planning consent was received.
• On enquiry HMRC issued assessments to VAT of £59,167 on the basis that the supply of the property was standard-rated because at the time of construction it did not comply with the planning consent.
• CMJ made an Appeal to the tribunal.

The FTT, dismissing the appeal, found:

• There was no dispute that a new building had been constructed. For VAT purposes that was not enough; there must be a valid statutory planning consent permitting construction in place before works commence, and the construction works must be carried out in accordance with that consent.
  • This consent must be in writing. The verbal assurances received by CMJ from the council prior to applying for retrospective planning consent were not sufficient.
• When the works were commenced CMJ only had planning consent for alteration works and not for demolition and reconstruction.
• The building warrant obtained did not constitute planning consent; both a warrant and consent are required under Scottish law and they operate under different statutory regimes.
• The issuing of a completion certificate before the final planning consent did not constitute a variation to the original planning consent. This, and the lack of enforcement action by the council, also did not mean that the retrospective consent was not required. Since it was required, until it was obtained there was no valid consent in place for the works carried out.

A cautious tale for builders who already had to navigate a long list of VAT rules and regulations even before the recent introduction of the CIS: Construction Industry reverse charge. Local authorities may accept planning applications after the fact but HMRC will not as this is not within the VAT rules for zero rating.

Useful guides on this topic

Land & Property VAT (Subscriber guide)
An outline of the VAT treatment of some of the more common supplies of land and property.

Land & Property: Dwellings
What is a dwelling for VAT purposes? What is the VAT treatment for construction, conversion, sale, and letting of a dwelling?

Land & Property: Relevant residential & relevant charitable purpose
What are the VAT rules for land and property that is used for a relevant residential purpose or a relevant charitable purpose? What are the claw back provisions affecting change of ownership or use?

Land & Property: DIY Housebuilders scheme
It is possible to recover VAT on constructing a new residential dwelling, or dwellings, even where there is no planned sale of the property. This recovery can arise under the special refund scheme for DIY housebuilders.

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Correcting VAT errors
What are the VAT error correction time limits? Can you correct errors through the VAT return? Do you have to notify HMRC?

External link

CMJ (Aberdeen) Ltd v HMRC [2021] TC8140