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HMRC internal manual

VAT Construction

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Apportionment for part-qualifying buildings: apportionment rules - zero-rating

The law - Value Added Tax Act 1994, Schedule 8, Group 5 (construction of buildings, etc)

The apportionment provisions are at Group 5, Note 10.

This provision applies to all supplies falling within Group 5, that is:

  • construction services (VCONST02000)
  • grants of a major interest in new qualifying buildings (VCONST03000)
  • grants of a major interest in qualifying converted non-residential buildings (VCONST04000)
  • conversion services supplied to Housing Associations (VCONST05000).

Applying Note 10

Note 10 does two things. It allows supplies that:

  • only relate to the qualifying parts of the building to be zero-rated
  • relate to both qualifying and non-qualifying parts of a building to be apportioned so that the element relating to the qualifying part can be zero-rated - Notice 708 Buildings and construction gives examples of the types of buildings affected.

In Leighton Park School (VTD 9392) the Tribunal confirmed that Note 10 does not allow apportionment between qualifying and non-qualifying activities when they are carried out in the same part of the building - none of that part is being used ‘solely’ for a qualifying purpose.

The law - Value Added Tax Act 1994, Schedule 8, Group 6 (protected buildings)

The apportionment provisions are at Group 6 Note 5.

Applying Note 5

Strictly speaking, the apportionment provision only applies to major interest grants in substantially reconstructed ‘protected buildings’ and not to supplies of services in the course of approved alterations. As these supplies were previously capable of being apportioned, we interpret the law so as to include ‘protected buildings’ that haven’t been substantially reconstructed.

Note 5 does two things. It allows supplies that:

  • only relate to the qualifying parts of the building to be zero-rated
  • relate to both qualifying and non-qualifying parts of a building to be apportioned so that the element relating to the qualifying part can be zero-rated.