Section 30(2) of Value Added Tax Act 1994 (“VATA”) provides that a supply of goods or services is zero-rated if the goods or services are of a description for the time being specified in Schedule 8 VATA.
Item 2 in Group 5 of Schedule 8 VATA specifies:
The supply in the course of the construction of:—
(a) a building … intended for use solely for … a relevant charitable purpose …
of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.
Note 16 to Group 5 provides as follows:
For the purpose of this Group, the construction of a building does not include:-
(b) any enlargement of, or extension to, an existing building …”
In the First-tier Tribunal (Tax) case of York University Property Company Ltd v Revenue & Customs  it was decided to build a chemistry building in two phases due to an initial lack of funds to complete the whole building. At the time phase 1 was completed, it was not known when phase 2 would be completed.
Phase 1 was a three-storey building shaped like a rectangle, with a sacrificial wall on one of its short sides.
A donation was made to the University, in 2010, enabling phase 2 to be completed. The University wanted the phase 2 works to be zero rated for VAT.
Phase 2 was in the same style and was of similar size and shape to phase 1, and was joined to phase 1 where the sacrificial wall previously stood.
Following completion of the phase 2 works, there was one single three-storey rectangular building that was double the length of the phase 1 construction. Without looking closely at the building it would now be impossible to tell that the two parts of the building were constructed at different times.
There was no disagreement between the parties that both the phase 1 and phase 2 works related to “a building … intended for use solely for … a relevant charitable purpose” within the meaning of this provision, and HMRC accepted that the phase 1 works fell to be zero-rated on that basis.
Of the precedent cases there had been only one where a second phase of works was found to be a continuation of the original development rather than an extension to a completed building.
The tribunal said the fact that the phase 1 construction contained a sacrificial wall in anticipation of the phase 2 works was of marginal relevance.
In one of the precedent cases the first phase single storey wing included foundations and steel beams of sufficient strength to support the additional storey to be added in phase 2, but this had not affected the tribunal’s conclusion that it was an enlargement of an existing building rather than a continuation.
The only precedent case at all supportive of the University’s argument, that phase 2 was a continuation, was different as it had rested on the finding that the kitchen and laundry block built in the second phase (included in the planning consent) was integral to the development, in that the hospital could not function without it. There had been only an 18 month gap between completion of the first phase and the commencement of the second phase. Moreover, in that case the Commission for Social Care Inspection had required that the kitchen and laundry facilities be built, and had granted an extension of time for that to be done.
In this case the Chemistry Department’s vision could not be achieved until phase 2 was completed, but there was no suggestion that the phase 1 construction could not function and be used for chemistry research until phase 2 was completed.
Phase 1 did so function, as did the Chemistry Department as a whole, for some 9 years until phase 2 was completed in 2013.
Phase 1 could have continued to so function indefinitely, without phase 2. There was no suggestion that any public authority required phase 2 to be completed within any stipulated timeframe, or at all.
So phase 2 of the building was, for purposes of Item 2 in Group 5 of Schedule 8 VATA, an enlargement of or extension to phase 1, rather than a continuation of the original development of the building and so not eligible for zero rating.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.