Prevention is better than Cure

Even before the forthcoming Construction Reverse charge changes impact on the Property and Construction industry, businesses in these sectors have to navigate on of the most complex areas of VAT.  This was illustrated in the recent First Tier Tribunal (FTT) decision in…

Blog27th Mar 2020

By Alistair Duncan

Even before the forthcoming Construction Reverse charge changes impact on the Property and Construction industry, businesses in these sectors have to navigate on of the most complex areas of VAT. 

This was illustrated in the recent First Tier Tribunal (FTT) decision in Gareth Bertram [TC07524].   

Bertram supplied his building services to an associated property development company (PropCo).  Propco developed 25 two-storey residential semi-detached houses for conversion to houses in multiple occupation (HMO). All 25 properties were fitted with new extensions and 14 were converted to separate dwellings, in these cases planning permission was sought during construction.  The FTT accepted that the cost to convert the properties into HMOs was minimal, often involving only the fitting of locks, although some properties required more major works. Bertram treated all his construction supplies to Propco at the reduced rate of 5% VAT.  Reduced rating at 5% was introduced to encourage developers to improve existing housing stock.  It applies where services and or building materials are supplied in respect of qualifying conversions, primarily a change in the number of dwellings, an HMO or a special residential conversion.  This reduced rate relief was in addition to the zerorate available for new dwellings. 

Due to the poor quality of Bertram’s records, HM Revenue and Customs (HMRC) was unable to establish exactly what supplies had been made to each property.   HMRC considered that the majority of the expenditure related to the extension works which should have attracted VAT at the standard rate.  Applying “best judgement”, HMRC raised an assessment for £59,184 in relation to VAT that had been wrongly charged VAT at the reduced rate. 

The FTT allowed the appeal in part, but accepted HMRC’s methodology in its best judgement calculation.  The FTT accepted that some costs must have been attributable to the fitting of locks for HMO conversion. In addition, the FTT accepted that some reduced rating applied for works to properties that were in poor condition.  However, for the reduced rate to apply to the extensions, the properties needed to have been empty for two years.  However, immediately on acquisition, and prior to the extension works being undertaken, Propco let the properties to letting agents who then put tenants into the properties.  As the empty homes condition was not met in most cases, the extension works failed the reduced-rate test. 

Although creation of the new self-contained dwellings could have qualified for zero rating, as Bertram did not wait for planning permission to be granted, again the conditions for zero rating had not been met. 

Bertram took a broad-brush approach that treated all of his supplies to Propco as reduced rated.  As Propco was not able to recover the VAT charged, this approach helped Propco.  However, by failing to understand the conditions for the zero and reduced rate reliefs, Bertram missed the opportunity to apply these provisions resulting in significant additional irrecoverable VAT being incurred. Unfortunately, by immediately letting the properties to letting agents and then building extensions, the properties would fail the two-year test for reduced rating to apply. 

A final nail in Bertram’s coffin was his failure to keep adequate records as this suggested to HMRC that he had a poor attitude to VAT compliance. 

AAB Comment 

The Bertram case is a perfect illustration of why it is advisable to seek expert advice prior to starting the work.  By planning and organising the works more efficiently, Bertram may have been able to benefit from the available reliefs.  In any event, taking advice on the correct treatment would have helped avoid the VAT problems and allowed Propco to budget for the correct VAT cost. 

AAB’s indirect tax team has significant experience in advising clients in the Property and Construction sectors.  We can assist with ensuring that the correct VAT treatment is applied to projects at the outset avoiding the situation that Bertram found himself in.   

In addition, in our Tax Disputes Resolution team, we have a diverse team of specialists covering all taxes and business areas. Our team is able to support clients with every aspect of their interaction with HMRC from strategy through to resolution.  Where businesses find themselves in dispute with HMRC on the treatment of construction works, the position is not always black and white.  Our team use their understanding of tax administration to support their technical knowledge to better manage the interaction with HMRC.  However, AAB’s preferred approach is about providing early support to prevent a dispute rather than managing and resolving a dispute when it occurs. 

If you would like to discuss either our indirect tax or tax dispute resolution services, please contact Alistair Duncan ( or your usual AAB contact. 

By Alistair Duncan, Head of Indirect Tax

For more information on Alistair, the Indirect Tax team and the Tax Dispute Resolution team, click here.


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