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HM Revenue and Customs Brief 40/12

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HM Revenue and Customs -Tax Authorities

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Issued 28 December 2012

VAT: Connection charges for water

This brief explains Her Majesty’s Revenue and Customs' (HMRC) change of policy on the VAT liability of first time connection charges for water.

Readership

Water companies, building contractors and plumbers.

Action

To be aware of HMRC's change of policy on water connection charges. This affects first time connection charges made by the same person who is supplying the water to
the same customer.

Background

Revenue & Customs Brief 43/11 announced that from 1 January 2012 one-off charges for the first time connection to gas and electricity made by the same person (or by members of the same VAT group) who supply the gas or electricity would follow the treatment of the utility and be reduced rated. Given the similarities, HMRC has now completed a review of first time connection charges for water.

Liability of first connection charges supplied with water


Where a customer contracts with a water supplier to provide mains water and that necessitates a first time connection to that water supply, the connection will be ancillary to the zero-rate supply of water providing the supplier of the water and connection are made by the same taxable person (or within the same VAT group) to the same customer.

However, if the customer is involved in a relevant industrial activity (e.g. manufacturing) the supply of the water and any connection will be standard rated. Further details are in Public Notice 701/16 paragraph 2.3)

First time connection of water pipe-work is standard rated if at the time of connection, no water supplier had been identified. The zero-rate only applies if in order to supply mains water for the first time, the supplier needs to carry out the connection (it is ancillary to the supply of water). However, where the connection is carried out for the first time without any reference to a water supplier, such work cannot be ancillary to the water supplier’s supply. In such cases, the water connection will be a separate taxable supply from the supply of water.

 
Liability of connection charges for replacement water supplies

Replacement of lead piping or damaged
pipework
Separate standard-rated supply
Water usage increases requiring a new
additional mains connection.

Separate standard-rated supply
Water usage increases and existing mains
connection is replaced with a new, larger
capacity mains connection
Separate standard-rated supply

Relocation of existing water service pipe
Separate standard-rated supply
Existing building is demolished and replaced
by new property or properties not being used
for a relevant industrial activity.
Zero-rated, as being incidental to
the new water supply
Property, not being used for a relevant
industrial use, is on an existing common water
supply and requires its own separate supply.
Standard-rated
Property is divided into multiple properties not
being used for a relevant industrial purpose.

If there is still one water
connection shared by the
individual properties, the supply
is standard-rated. Otherwise
zero-rated.
Reconnection charges for existing properties Standard-rated


Any repairs, alterations or replacements carried out to existing pipe work of a water supply are standard rated.

The following table gives examples of the VAT liability of the connection charges for replacement supplies of water.

Replacement of lead piping or damaged
pipework
Separate standard-rated supply
Water usage increases requiring a new
additional mains connection.

Separate standard-rated supply
Water usage increases and existing mains
connection is replaced with a new, larger
capacity mains connection
Separate standard-rated supply

Relocation of existing water service pipe
Separate standard-rated supply
Existing building is demolished and replaced
by new property or properties not being used
for a relevant industrial activity.
Zero-rated, as being incidental to
the new water supply
Property, not being used for a relevant
industrial use, is on an existing common water
supply and requires its own separate supply.
Standard-rated
Property is divided into multiple properties not
being used for a relevant industrial purpose.

If there is still one water
connection shared by the
individual properties, the supply
is standard-rated. Otherwise
zero-rated.
Reconnection charges for existing properties Standard-rated
 

Civil engineering works supplied separately from water

The new policy applies only where the provider of the connection is the same person who supplies the water (or a member of the same VAT group). If the connection is carried out by a third party, the supply will remain standard rated.

However, some supplies of civil engineering works provided in isolation from water can already be zero or reduced-rated under certain circumstances as follows:

Supply Liability
The first time connection of a new
dwelling or relevant residential or
relevant charitable building to the water
supply if the connection is made as part
of the construction of the building.
Zero rated under item 2 of Group 5 of
Schedule 8 to the VAT Act 1994.
The supply to a housing association of
civil engineering works for connecting a
property to the water supply being
converted from commercial use to
relevant residential use.

Zero-rated under item 3 of Group 5 of
Schedule 8 to the VAT Act 1994.

The first time connection to a mains
water supply in the course of construction
of civil engineering works necessary for
the development of a permanent park for
residential caravans
Zero-rated under item 2(b) of Group 5 of
Schedule 8 to the VAT Act 1994.


Making claims or adjustments


Where a customer has paid VAT on a connection charge that should have been zero-rated and have been unable to deduct this VAT, they may approach their supplier for a refund of the VAT paid.

Where a supplier wishes to make a claim to HMRC (under section 80 of the VAT Act 1994) for repayment of VAT incorrectly accounted for, they may do so, subject to the conditions set out in Notice 700/45 How to correct VAT errors and make adjustments or claims.

All claims will be subject to the four-year time limit in section 80(4) of the VAT Act 1994 and to the set-off provisions in section 81 of the VAT Act and section 130 of the Finance Act 2008.

We may reject all or part of a claim if repayment would unjustly enrich the claimant.

More details on making claims and ‘unjust enrichment’ can be found in Notice 700/45 How to correct VAT errors and make adjustments or claims.  

Further information

For further information and advice, please contact our Helpline on 0845 010 9000. 


About the Author

© Crown Copyright 2012.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



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Article Published/Sorted/Amended on Scopulus 2013-01-03 09:06:07 in Tax Articles

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