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During the construction of a new dwelling a building constructor can zero-rate the construction services and any building materials supplied with those services. Building materials are defined as “goods of a description ordinarily incorporated by builders” but furniture, electrical and gas appliances and carpeting materials are specifically excluded (VAT Notice 708 Section 13 provides further details).

Therefore, if a building contractor installs non-building materials, for example fitted bedroom furniture and white goods in the kitchen of a show house VAT will be charged on the goods (the installation can still be zero-rated).

Although a show house is used to promote a housing development, it will be eventually sold as a zero-rated new dwelling and the installed non-building materials will be included in the sale. As a result the input tax incurred is blocked from recovery under Article 6 of VAT (Input Tax) Order 1992 (SI 1992/3222).

However, the “Blocking Order” does not apply to goods that are not actually incorporated in the building such as loose or freestanding furniture. The input tax on such items used in show houses is recoverable but output tax should be accounted for when they are eventually sold, whether they are taken out and sold separately or sold with the house.