Mostly not. When a new home is sold zero-rated, the blocking order stops the developer reclaiming VAT on goods that aren't building materials. That catches carpets, fitted wardrobes and most electrical appliances. Kitchen units, vinyl flooring and heating appliances are fine. Loose furniture in a show home is recoverable, with VAT due when it's sold.

Key facts

  • The blocking order applies where the developer makes a zero-rated grant of a major interest in the building[1].
  • Furniture other than kitchen furniture, electrical or gas appliances and carpets are excluded from building materials[2].
  • Vinyl and parquet flooring are building materials. Carpets and carpet tiles are not[3].
  • Loose furniture in a show home isn't incorporated in the building, so its VAT is recoverable in the normal way[4].

What is the blocking order?

It's a rule in articles 2 and 6 of the VAT (Input Tax) Order 1992[1][5]. Where a developer sells a new dwelling zero-rated, it can't recover VAT on goods incorporated in the building that aren't building materials[1].

The test runs in order. Is there a zero-rated major interest grant? Are the goods incorporated in the building or its site? Are they building materials under Notes 22 and 23 to Group 5 of Schedule 8[6]? If they're incorporated and aren't building materials, the VAT is blocked[1].

The rest of the build is untouched. Our guide to developer VAT on new builds covers the zero-rating itself.

Which items are blocked?

Three groups are excluded from building materials: furniture other than kitchen furniture, electrical or gas appliances, and carpets[2].

Floors. Carpets and carpet tiles are blocked. Vinyl and parquet are building materials. Gripper rods and stair nosings are fine if they're separately identifiable on the invoice[3].

Storage. Fitted wardrobes are furniture, so they're blocked. Airing cupboards, under-stair cupboards and cloaks cupboards formed as part of the building are building materials[7]. Kitchen and utility room furniture is a building material[8].

Appliances. Electrical and gas appliances are excluded unless they heat space or water, or provide ventilation or air cooling. Burglar and fire alarms, lifts, and door entry systems in blocks of flats are also allowed[9]. A fridge, washing machine or dishwasher is none of those.

How are show homes treated?

The blocking order applies to goods incorporated in show houses in the same way it applies to other houses[4]. So the show home's carpets and fitted wardrobes are blocked like any other plot.

Loose furniture is different. It isn't incorporated in the building, so the VAT is recoverable in the normal way. Output tax is due when you sell or dispose of it. If it's only used for display and then scrapped, no output tax is due[4].

Does it matter if the builder supplies the carpets?

No. A builder installing goods that aren't building materials, such as carpets or fitted bedroom furniture, standard-rates that part of the work[10]. The developer then pays VAT it can't recover.

Where one invoice covers both, the developer needs it split. Otherwise the recoverable part is harder to support.

What does it cost a typical scheme?

VAT at 20%[11] on items that are often a few thousand pounds a plot adds up fast. On a 30-home scheme, the worked example below shows £42,000 of blocked VAT. That belongs in the appraisal as a cost, not in the VAT return as a claim.

Worked example

An invented 30-home scheme, every home sold zero-rated. Costs per home, before VAT:

Carpets: £3,500. Blocked[3]

Fridge, washing machine and dishwasher: £2,000. Blocked[9]

Fitted wardrobes: £1,500. Blocked[7]

Blocked cost per home: £7,000. Across 30 homes: £210,000

Blocked VAT at 20%: £42,000[11]

Against that:

Kitchen units: £8,000 a home, building materials[8]. £48,000 of VAT recovered across the scheme

Show home loose furniture: £25,000. £5,000 of VAT recovered, with output tax due when it's sold[4]

Our view

The blocking order isn't a trap if it's in the appraisal from the start. Where it goes wrong is a VAT return that claims everything on a fit-out invoice, then an HMRC check that unpicks it.

Ask your fit-out suppliers to invoice blocked and recoverable items separately. Review the specification with the VAT in mind. A vinyl or timber floor and a formed storage cupboard keep the VAT; carpet and a fitted wardrobe don't.

Common questions

Can I reclaim VAT on integrated kitchen appliances?

Not on the appliances themselves. Electrical appliances are excluded from building materials unless they're in an allowed category such as heating or ventilation[9]. The kitchen units around them are building materials[8].

Does the blocking order apply to a house I'm letting?

It applies where you make a zero-rated grant of a major interest[1]. Without that grant it doesn't apply, though other VAT rules may still restrict recovery on a let property.

Is a boiler or heat pump blocked?

No. Appliances designed to heat space or water are not excluded from building materials[9].

Do I charge VAT when I sell the show home furniture?

Yes, if you recovered the VAT on it. Output tax is due on disposal, unless it was only used for display and scrapped[4].

Sources

  1. HMRC VAT Construction Manual VCONST12100: the blocking order. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst12100
  2. HMRC VAT Construction Manual VCONST13500: exclusions from building materials. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst13500
  3. HMRC VAT Construction Manual VCONST13800: carpets. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst13800
  4. HMRC VAT Construction Manual VCONST12200: show houses. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst12200
  5. The Value Added Tax (Input Tax) Order 1992, article 6. www.legislation.gov.uk/uksi/1992/3222/article/6
  6. Value Added Tax Act 1994, Schedule 8, Group 5. www.legislation.gov.uk/ukpga/1994/23/schedule/8
  7. HMRC VAT Construction Manual VCONST13640: cupboards and wardrobes. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst13640
  8. HMRC VAT Construction Manual VCONST13680: kitchen furniture. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst13680
  9. HMRC VAT Construction Manual VCONST13710: electrical and gas appliances. www.gov.uk/hmrc-internal-manuals/vat-construction/vconst13710
  10. HMRC VAT Notice 708: buildings and construction (paragraph 8.4). www.gov.uk/guidance/buildings-and-construction-vat-notice-708
  11. GOV.UK: VAT rates. www.gov.uk/vat-rates
About the author

Kieran Holsgrove is a Director and Co-Founder of Grafene Accounting, the property tax specialist firm based in Liverpool. He advises property developers, investors and landlords across Merseyside, Greater Manchester, Lancashire and Cheshire on tax structuring, developer VAT, SDLT and the long-view decisions that compound over the life of a portfolio.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here. Please take advice before acting on anything above.

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