HMRC internal manual

VAT Construction

Zero-rating the construction of buildings: is a building being constructed: enlargements to existing buildings to create additional dwellings

Note 16(b) states that the enlargement or extension of an existing building is ‘the construction of a building’ to the extent that the enlargement or extension creates an additional dwelling. In the clearest case, this relief applies to the construction of a new storey of flats on top of an existing block of flats.

It is important that the new dwelling is contained entirely within the enlargement or extension. If any of the original building is incorporated into the new dwelling the works are not zero-rated. There may, however be scope for them to be reduced-rated (VCONST06000).

In Michael, Gillian and Norman Smith (VTD 17035), works that involved the creation of a second dwelling, appeared to form a semi-detached house next to an existing one but in fact included a part of the original building within the new one. The Tribunal decided that where an enlargement or extension contained part of a new dwelling (the remainder of the new dwelling being formed within the original building) the words ‘to the extent that’ in Note 16(b) allowed zero-rating for the enlargement or extension containing part of that dwelling but not the other works.

In our view this case was incorrectly decided. We remain of the view that the zero-rating provision at Item 2 is limited to dwellings and not parts of dwellings. This is because the provision treats a dwelling as a building despite being within an extension or enlargement - and the dwelling is the extent to which the extension or enlargement can be treated as a building. There is, therefore, no basis for apportionment between the part of the dwelling within the extension and the rest of the dwelling in the remainder of the building. Consequently, the decision should not be followed.

If the enlargement or extension contains more than the new dwelling or if two or more dwellings, more than the dwellings and common areas (such as commercial premises), then zero-rating only applies to the part of the enlargement or extension that contains the dwelling or dwellings and common areas, with an appropriate apportionment being required.