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HMRC internal manual

VAT Construction

Zero-rating major interest grants in substantially reconstructed ‘protected buildings’: what ‘substantially reconstructed’ means: stage 1 - is the building reconstructed

The first major interest grant in a building can’t be zero-rated if the building has not been reconstructed. The building as a whole must be reconstructed. To be zero-rated, one of the alternative tests at stage 2 must also be met (VCONST10340 and VCONST10350).

‘Reconstruction’ is not defined in law. In the absence of a legal definition, the word is to be given its ordinary meaning consistent with the context in which it appears. The ordinary meaning of reconstruct is to construct anew of something that was already there. Implicit in such an act is demolishing and rebuilding most of the original building.

Whether a building has been reconstructed will be a matter of fact, but in this legal context, what is carried out can’t logically exceed what is necessary to satisfy the ‘shell’ test in Note 4(b), since such a building will have been substantially reconstructed. Accordingly, reconstruction is taken to mean the removal and reinstatement, perhaps to a different form or configuration, of most of the original fabric but which falls short of removing the external walls and other external features.

In Donald Barraclough (VTD 2529), the works of renovating a three-storey dwelling consisted of enlarging a kitchenette, adding a cloakroom, replacing two windows that were out-of-keeping with the building, replacing the covering on a porch to match the building, installing central heating, constructing a second bathroom on the second floor, rewiring and installing a modern kitchen. The Tribunal decided that the works were not that of reconstruction, stating:

We are of opinion that, giving the word ‘reconstruction’ its normal everyday meaning, he did not do so. Those works amounted to a minor enlargement of the building and a modernisation of its interior.

In practice, the question of whether the building has been ‘reconstructed’ only proves an issue for developers who can’t use the ‘gutting’ test when determining if the reconstruction is substantial - this is because developers who ‘gut’ the building will, by the nature of the works they carry out, meet the ‘reconstruction’ test.

If the whole building is demolished within the terms of Note 18 to Group 5 (VCONST02240 and VCONST02250) and rebuilt, it will be a new building and the appropriate course of action is to examine whether zero-rating is available under Group 5 (VCONST03000).