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HMRC internal manual

VAT Construction

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HM Revenue & Customs
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Building materials - developers and the ‘Blocking Order’: blocking input tax

About the ‘Blocking Order’

The purpose of the ‘Blocking Order’ is to provide broad equity between people who have construction work done for them by a contract builder on the one hand and, on the other, someone who purchases a building from a speculative builder (that is a developer that builds and sells as principal).

In the former, the construction costs are zero-rated with the supply of goods that are not building materials being standard-rated (VCONST11000).

In the latter, the supply of the completed building is zero-rated, but the developer is prevented (or ‘blocked’) from recovering input tax on goods that are not building materials.

The law

The relevant law is Articles 2 and 6 of the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222). This is colloquially known as the ‘Blocking Order’.

How to interpret the ‘Blocking Order’

Article 6 of the ‘Blocking Order’ does not simply ask whether goods are (or are not) building materials within the meaning given at Note 22 to the Value Added Tax Act 1994, Schedule 8, Group 5. Instead the ‘Blocking Order’ has its own definition of ‘building materials’ at Article 2. This is necessary in order to enable the ‘Blocking Order’ to:

  • exclude from credit for input tax the tax on goods that fall within Note 22 but would otherwise be standard-rated if supplied by a contract builder because the service was not a zero-rated supply in the course of construction of the building
  • allow for eligible goods that are standard-rated because a conversion is taking place but would have been zero-rated if a ‘new’ building had been constructed by a contract builder.

Decisions on the ‘Blocking Order’ should be approached in the following way:

Step Issue Action
     
1 Will a zero-rated major interest grant be made in the building? Yes, go to step 2.

No, the ‘Blocking Order’ doesn’t apply.
  | | 2 | Are the goods incorporated (VCONST13300) in the building or its site? | Yes, go to step 3.

No (that is the goods are either not incorporated or are incorporated outside of the site), then the ‘Blocking Order’ does not apply and input tax is recoverable in the normal way.
  | | 3 | Would the service of incorporating the goods be zero-rated if the building were to be constructed from new or, in the case of a non-residential conversion, if that service were being provided to a relevant housing association? | Yes, go to step 4.

No, the supply of the goods would also be standard-rated. The ‘Blocking Order’ does not apply and input tax is recoverable in the normal way.
  | | 4 | Are the goods building materials within the meaning of the Value Added Tax Act 1994, Schedule 8, Group 5, Notes 22 and 23? | Yes, then input tax is recoverable in the normal way.

No, then the ‘Blocking Order’ does apply and input tax is not recoverable.