HMRC has a knack of shocking us when they unveil new policies by appearing to bury them in a revised draft of a long and multi-function policy notice, as if to challenge us to a clandestine game of hide and seek. They did this a few days ago when releasing a new draft of Public Notice 708 (about construction services) for comment and consultation without forewarning us of the major change to be found in new paragraph 3.4.1. Anyone who is tempted to go to the HMRC website to review Notice 708 will not find the change. It is restricted to consultees only.
The difference is that old 708 acknowledges that professional services are always standard rated when separately supplied, but if subsumed in a contract of constructing a zero rated building, they become zero rated since only the construction element actually exists as a product at the end of the process. This is known as "Design & Build". The new (and perhaps never to be unveiled in this condition) 708 says that the professional charges must remain standard rated when subsumed in a design & build agreement. The potential effect on charities and housing providers is potentially vast.
A puzzling aspect is when they thought we should apply this new approach. Anecdotal feedback suggests they will more formally announce a period of transition following which the new policy will be fully introduced. Organisations may now wish to accelerate their plans in the hope of getting inside the time limits for the transitional period, which we can only hope will be realistic.
But are they right to change tack in any case?
In my view the answer is “no”. First, there are no precedent cases of which I am aware which justify trying to treat a product which has been expunged in itself by absorption into another different product as surviving through to the final product and changing the VAT treatment accordingly. For example banking supplies are exempt. Legal drafting for banking agreements may be taxable when supplied by a lawyer, but there is no part of a bank charge which then can be taxed because it is a portion of legal services.
Second it seems that the approach is only to be applied to construction services; that is, building works. It does not appear to be applied to the zero rated sale of an interest in a building (a land supply). And how could it? If that were the case then new housing would no longer be zero rated. Houses would be partly taxable to reflect architecture costs and taxable land bank acquisitions. So why should construction be singled out from a right over a building?
It is not just the means of unveiling which is ramshackle about this policy. It seems to have been made up in a moment of madness.
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