Under UK law the sale of new dwellings is zero rated. This means that although the developer does not have to charge VAT it is entitled to recover VAT on the costs it incurs in building the houses including the cost of materials. However there is a provision, the builders block, which prevents developers recovering VAT on goods incorporated into the building that are not building materials. In practice this means that where developers include white goods and carpets in a residence they are not entitled to recover VAT they pay on the purchase of those goods.
Taylor Wimpey had two basic arguments.
- The builders’ block only applied to fixtures and white goods were not fixtures and therefore were not blocked.
- If the white goods were fixtures they were building materials because they were ordinarily incorporated in dwellings. Building materials are not subject to the blocking order. When the block was later changed to specifically include white goods the change was unlawful under EU law and should be ignored
On the first argument the Tribunal found that the blocking order applied to both fixtures and fittings and that Taylor Wimpey’s analysis of the law was flawed. The Block was designed to prevent recovery of VAT on non core building materials. If it only applied to fixtures VAT recovery would be available on any fittings supplied with a house but not on certain fixtures, the tribunal did not believe that this could be the intent of parliament.
On the alternative argument the taxpayer argued that if the white goods are fixtures they were excluded from the block on the basis that they were ordinarily incorporated in sales of dwellings. The Tribunal found that for the period considered (i.e. from 1977 – 1984) white goods were not ordinarily incorporated in dwellings in that more often than not white goods were not included in the sale of new dwellings. Therefore they could not be treated as building materials to which the input tax block did not apply.
The tribunal also rejected the argument that the changes made to the blocking order in 1984 resulted in the blockage being contrary to EU law as the practical scope of the blockage was the same both before and after the changes.
On the points considered this was a resounding defeat for the taxpayer. However there is another line of argument not yet considered by the Tribunal that under EU law the correct position is that the blocking order is entirely invalid and as a result VAT should be recoverable on the purchase and chargeable on the sale of the white goods. The taxpayer would then have to argue that HMRC are out of time to assess for the tax on the sale and that have no right to set that VAT off against the input tax claimed. It is to be assumed that this argument will be subject to a future tribunal hearing.
We expect that the taxpayer will appeal this decision to the Upper Tribunal. Clients who have made a claim should be possible to continue to stand behind this lead case.
For more information contact your local VAT specialist or Vinny McCullagh