A developer thought that he had constructed a new dwelling and that the sale of it was a zero rated supply so that the input VAT incurred in relation to the redevelopment was recoverable. HMRC decided otherwise.

The brief facts were as follows:

The property was in London and the developer intended to demolish the existing building and construct a new house. However, because of the way the original building had been constructed, there was a risk that the party wall between the property and the neighbouring property might fall down. Accordingly, the developer chose to retain one half of the front facade of the property to provide support to the party wall.

When the property was sold, HMRC asserted that zero rating did not apply because the original building had not been completely demolished. It assessed that the developer should pay £45,295 VAT (plus penalty interest) and treated the sale of the property as an exempt supply, so that no input VAT was recoverable.