707032 - Treatment of supplies of electricity and piped gas: new house construction – supplies to developers

Utility companies supply electricity to property developers at construction sites which they are developing into housing estates. The developer will have planning permission to build several units to be occupied as dwellings, The ultimate intended use is domestic use, although they may be sold off plan prior to actual completion and occupation.

Note 5(g) to Schedule 7A applies the reduced rate of 5% where all the electricity the provider supplies to a person at the premises is at a rate 1000 kilowatt hours a month or less. Note 6 says that supplies are for domestic use, if and only if, they are for use in a dwelling or a number of dwellings,

Some utility companies have attempted to split the supplies that are made to the developer and apply the reduced rate to the proportion that relates to individual houses once individual electricity meters have been installed in them . They argue that each house is a separate premises subject to the rule in Note 5(g) (see above) so that the supply can be treated as a domestic supply. Alternatively, they argue that the supply is for use in a dwelling because it will be used as a dwelling when occupied. A similar argument can be made for piped gas.

HMRC does not accept either of these arguments is correct, HMRCs view is that Note 6 will only apply when a completed house has been transferred to a third party enabling it to be occupied for domestic use. It is at this point that it becomes a dwelling and the supply to the occupant will then be covered by Note 6. Until that point the building is not a dwelling within the normal meaning of that word, ie a building where somebody actually occupies or /dwells. This electricity in question is not used by the final consumer. The supply has to be to one person under Note 5 at premises which are occupied by that person. The plots of land that are being developed turn into separate premises when the houses are sold to third parties at which point there will be a new recipient of any electricity supply.

Any electricity supplied to the developer during the development period and until completed houses are sold is used by the developer for the purposes of his business, It is a business expense and any VAT paid can be deducted as input tax subject to the normal provisions. It is only when the completed houses are sold on to householders that they can be separated from the site premises and can be seen as separate premises for the purposes of Note 5.

Some utility companies have attempted to pay no Climate Change Levy (CCL) on electricity and gas supplies whilst the construction of houses is ongoing as they argue the supplies are to residential buildings. HMRC does not accept this argument is correct. HMRCs view is until a completed house is sold on by the developer to a third party, the gas and electricity used in that house are not used for domestic purposes, and so CCL is due. The CCL legislation is governed by Schedule 6, para 8 & 9 of the Finance Act 2000, this mirrors the VAT legislation.

HMRC’s position is that, when the house is sold, the new owner takes over responsibility for the fuel and power and decides on the supplier to use. The rules will then apply to the supplies made to the new owner (which may be made by a different supplier) who would use the supplies for domestic use which is excluded from CCL. The CCL legislation in Schedule 6, paragraph 8 of FA 2000 mirrors that of the VAT legislation, so if the supply of energy is not for domestic, non-business use then CCL would apply following the VAT legislation.