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June 9, 2017

VAT on the Construction of a ‘Pirate Island’

In the case of The Master Wishmakers Ltd v HMRC, the First-Tier Tribunal considered whether VAT should be charged at 0% or 20% with respect to the construction of “Challis Island”, a man-made island with 5 buildings/structures, themed upon a 18th Century Caribbean pirate oasis.

 The Law

VAT is chargeable at 0% on the supply of certain goods and services that are ‘zero-rated’.  Even though a business making a zero-rated supply will not collect any VAT on their sale, they are still deemed to be making a taxable supply and can normally claim back the VAT they have paid on their own purchases.

This situation can be very advantageous for business that make large amounts of zero-rated supplies.

The construction of a ‘building designed as a dwelling’ and its subsequent sale by the builder is eligible to be zero-rated.  In order for a building to be designed as a dwelling it must:

a)    consist of self-contained living accommodation;

b)    there must be no provision for direct internal access from the dwelling to any other dwelling or part thereof;

c)     the separate use, or disposal of the dwelling must not be prohibited by the term of any covenant, statutory planning consent or similar provision; and

d)    statutory planning consent must have been granted in respect of that dwelling and its construction . . . carried out in accordance with that consent.


  • The Master Wishmakers Ltd (TMW) was a company engaged in the production of bespoke themed structures.
  • Two separate planning applications were submitted in respect of Challis Island: one in September 2013 (which was later withdrawn); and one in November 2013, following the completion of the work. Planning permission was granted in February 2014 and applied retrospectively to the date construction.
  • A VAT assessment was issued by HMRC in respect of 15 invoices raised by TMW in connection with the construction of Challis Island that showed the supplies as eligible to be zero-rated.

The Case

HMRC challenged the eligibility for zero-rating on the grounds of Conditions C and D as mentioned above. They argued that the works on Challis Island were completed before planning permission was granted and therefore, Condition D was not met.  Moreover there were restrictions around the property that were relevant for Condition C.

TMW contended that Coffer’s Cabin (one of the 5 buildings constructed on the island), met all four conditions for a dwelling to be zero-rated on the same basis that they would be met for a holiday home under the terms of HMRC’s VAT Notice 708 paragraph 5.4. They accepted that the other buildings did not meet the conditions required for a dwelling.

Given the development was unusual and had not been contemplated by the relevant VAT legislation, the tribunal sought to confirm whether some or all of the works undertaken in respect of Challis Island was eligible to be zero-rated.

The Decision

On the basis that Challis Island was completed before planning permission was obtained (February 2014) the Tribunal found that Condition D had not been met and TMW was not entitled to zero-rate its constructions of Coffers Cabin at the time of supply.

The Tribunal did not give its opinion on whether Condition C would or would not have been met if Condition D had.



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