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HMRC internal manual

VAT Construction

HM Revenue & Customs
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Zero-rating the construction of buildings: are my services supplied ‘in the course of the construction’ of the building: work closely connected to the construction of the building

Work that does not involve constructing the fabric of the building itself can be zero-rated provided it is supplied ‘in the course of the construction’ of that building.

The Court of Session judgment in Rannoch School Ltd ([1993] STC 389) is support for the proposition that there is wide scope to zero-rate services closely connected to the construction of a building, but significantly limited to what is supplied ‘in the course of construction’.

This case was about the construction of a sewage treatment plant constructed at the same time as new zero-rated accommodation for its pupils. The sewage plant was required as a condition of the planning permission. It served the whole school, as it was more economic to build a new plant for the whole school than to build one for the new building and keep the existing plant.

Lord Justice Clerk (Ross) said:

The fact that the installation of the sewage treatment plant in this case involved work of a civil engineering nature is not, in our opinion, fatal to the claim that it constituted the supply of services in the course of the construction of the new [accommodation for pupils]. The expression ‘any services’ is unqualified, and services of a civil engineering nature may qualify for zero rating under item 2 provided that they are supplied in the course of the construction of a residential building.

Note: Although the judgment went on to allow all of the works to be zero-rated, the introduction of Note 11 in 1995 now allows for works that fall partly within and partly without the relief to be apportioned. Had this Note been in force at the time of this case then such an apportionment would have been appropriate.

The High Court judgment in St Mary’s RC High School ([1996] STC 1091) explored, in greater detail, the scope of ‘in the course of construction’. It confirmed that not all services can be zero-rated and explained the correct test to apply:

The services covered by [item 2] are not restricted to those of constructing the building itself… The phrase ‘the course of construction of a building’ gives a wider scope to the services in this item… Where the services are not those of constructing a building itself there has in my judgment to be a relation between them and the construction of the building…

Firstly, the services must be connected with the construction of the building in that they either facilitate its construction or produce in their finished result one whole with the building…

Secondly, there has to be a temporal connection between the construction of the building and the provision of the other services if those other services can be said to have been provided in the course of the construction of the building.

The Court’s first test contains two elements, only one of which need be met (VCONST02570).

The Court’s second test must always be met (VCONST02580).

In some cases the works in question may only partially qualify, in which case an apportionment may be agreed (VCONST02800).