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Planning restrictions can affect the VAT treatment of a new house

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25 June 2012

Most things that are purchased are subject to VAT.  A new house is an exception as  it is zero rated. The zero rating of new residential accommodation means that the person constructing the house can reclaim VAT on related expenses whilst not having to charge VAT on the onward sale.

The relief also extends to DIY housebuilders, for whom there is a VAT refund mechanism that enables them to reclaim the VAT they incur.  This ensures that VAT does not become an additional cost to people who choose to build a house for themselves.

The effect of planning restrictions

The relief depends on the building qualifying as zero rated residential accommodation. However, the terms of the planning consent allowing the construction of a new house need to be considered, as this can affect the ability to reclaim the VAT incurred.  A recent case has illustrated the relevance of planning consent for farmers constructing a new farmhouse.

In the case, a farmhouse had been built with a stipulation in the planning consent that the house could not be sold separately, and would always be ancillary to the agricultural use of the land.  As a result, the Court concluded that the house did not qualify for zero rating, as its separate use/disposal as residential accommodation was prohibited.

Going forward

Farmers proposing to construct a new farmhouse should ensure that the potential for zero rating, and the ability to reclaim VAT incurred, is considered at an early stage.  This should be when making and negotiating an application for planning consent, when terms will be discussed that can affect zero rating. Failing to secure zero rating can be costly.

Hazlewoods Indirect Tax Team will be happy to assist you in this matter. Please call Adam Lloyd or Julian Millinchamp on 01242 237661. For any other tax planning issues, please contact Nick Dee or Peter Griffiths on 01242 680000.

Julian Millinchamp - Indirect Tax Director
Julian Millinchamp
Indirect Tax Director Contact details