Zero Rating on New School Buildings

HMRC tried to deny zero rating for the construction of a new teaching block at St Brendan’s Sixth Form College in Bristol. Getting this right has big cashflow implications, so this ruling should help reassure that new buildings can be zero rated for VAT purposes.

St Brendan’s Sixth Form College in Bristol constructed a new teaching block. The construction of new buildings by an academy usually qualify for a specific VAT relief that means the works should be zero rated.

At first glance the new building appears to meet the conditions for this favourable treatment, but HMRC had other ideas.

The problem that the Revenue had with this project was the inclusion of the high level walkway that joined the new building (Block D) to the existing nearby building (Block C). This walkway was not the main entrance to the building, but provided a secondary means of access to the building.

The significance of the zero rating is two-fold. Firstly, zero rating has big cashflow benefits, as the VAT does not have to be funded up front and, secondly, the Revenue may refuse to repay VAT that has been incorrectly charged by the building firm.

Fortunately common sense prevailed when the matter went before the First Tier Tax Tribunal and zero rating of the building works was confirmed, much to the relief of the College. The case can be read here: TC06384.

Hopefully HMRC will not appeal this judgement, but it indicates that considerable care is required when considering the VAT position of major building projects.