One of the foundations of developing property is securing planning permission. Residential developers will already be accustomed to the idea that a new dwelling can be built with the construction costs being zero-rated for VAT purposes. This, of course, only applies if the dwelling has been constructed in accordance with the planning permission granted. However, in a recent case of Nigel Williams v HMRC  UKFTT 0846 (TC) HMRC was successfully able to deny the zero-rating of a dwelling, despite all of the pre-conditions and formalities of the planning process being fulfilled.
Nigel Williams v HMRC
The case concerned an applicant who had been granted planning permission for an extension to a dwelling. The extension plans included the demolition of a wall. As the work began it soon became apparent that the planned works could not progress because of significant structural problems within the dwelling. Therefore, after discussion with a planning consultant, the decision was made to demolish the entire dwelling and build a new one in its place. Contractors were already on site and so it was agreed that work would begin immediately.
A retrospective planning application was submitted and granted in August 2015. The application was effective from March 2015. Having obtained the planning permission for the new dwelling, and with no indication otherwise, the developer had understandably assumed the work would be zero-rated for VAT purposes.
However, HMRC argued that the services carried out before the retrospective planning permission application was submitted were not eligible for zero-rated VAT. It argued that the only planning permission in existence when work began on the property was granted for the previously envisioned extension and granted subject to the normal rate of VAT at 20%. Therefore, although planning permission had been granted, the services were not eligible for zero-rating prior to that date, even though the planning permission was granted retrospectively to an earlier date.
Although somewhat sympathetic to the applicant, the Tribunal agreed with HMRC. It concluded that the relevant time to consider the planning permission situation was the time at which the supplies were made i.e. prior to being granted in August 2015.
A cautionary tale from HMRC
This case highlights the fact that the tax and planning legislation were not designed in tandem. It demonstrates how crucial timing is when obtaining planning permission for projects such as these. As a result, even the most efficient and cautious solicitor must have a new attitude. One that can be prepared for HMRC’s ever more meticulous and sophisticated inspections of planning documentation.
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