Planning prevents poor VAT recovery on developments
VAT can be demanding when it comes to documentation, and none more so than when developing residential property. The need to obtain the correct planning permission, at the right time, is frequently overlooked and proves expensive for those claiming VAT on costs or seeking to apply zero or reduced rating to residential development projects. HMRC’s recent Brief on Planning Development Rights (PDRs) & the cases of Andrew David Reeves & Scott Kernohan highlight some of the many pitfalls.
Revenue & Customs Brief 9 (2016) – 3 May 2016
PDRs can permit development without the need for the usual statutory planning consent (SPC) – surely removing the VAT risk? Not so.
HMRC’s view is that the conversion of non-residential buildings to dwellings, whether as developer or DIY scheme claimant, can qualify for zero-rated sales and reduced rated build costs if conditions are met. One such condition is the obtaining of a SPC, so what happens if this is replaced by PDRs?
HMRC will still insist on evidence that the works are lawful. Evidence should be either
(a) written notification from the LPA advising;
(i) of the grant of prior approval, or
(ii) that prior approval is not required, or
(b) evidence of deemed consent and evidence the development is a “permitted development”.
A simple SPC is now replaced by alternative documentation for PDR developments.
Two recent cases highlight some potential pitfalls in this area.
In Scott Kernohan formal planning permission for a rebuild project was invalid at the time the DIY claim was made, following a change of plans and a decision to demolish the existing property. This permission had been overlooked, whilst building regulations requirements and even council’s tacit agreement were obtained. After HMRC’s rejection of the DIY claim the taxpayer obtained planning approval with retrospective effect, however HMRC and the Tribunal held this was insufficient. At the time of making the claim the taxpayer could not evidence the works were lawful, so the claim failed.
In Andrew David Reeves, the Tribunal agreed with the taxpayer that the retention of a gable wall of a cottage was within the agreed planning permission to rebuild a residential property virtually from scratch. However, the Tribunal agreed with HMRC that this wall was not a “façade”, which is ordinarily acceptable, so the claim was lost. (The definition of a façade for these purposes merits consideration as a topic in itself).
If you would like to discuss any aspect of VAT in relation to property, please do not hesitate to contact Richard Collier or your usual Mercer & Hole contact.
Date: 17th June, 2016
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