The Charity Tax Group (CTG) is hoping to hear this month whether HMRC has changed its mind about proposed changes to VAT rules on building work which experts have warned could be “very costly” to the sector.

First revealed in a technical briefing by tax consultant Socrates Socratous, the changes to the treatment of 'design and build' work stem from a recent European Court of Justice (ECJ) decision in a case concerning Talacre Beach Caravan Sales.

In the past, HMRC has accepted that professional services provided by a building contractor would be zero-rated if provided alongside zero-rated building work, but amended its view following the ECJ decision and circulated a new proposed policy in VAT Notice 708.

CTG sought its own legal opinion which disputed the decision, and according to CTG's principle VAT consultant Peter Jenkins, HMRC has said it is willing to make a change if it receives a “watertight” legal justification to do so.

“HMRC has agreed to consider it, put it to their lawyers and come back to us, and then we will know whether they agree with it.

“They are being very helpful, they’re not going gung ho at this and saying they want to tax the design element, they’re saying that this is a difficulty of European law and if we can find a way around it, then they’re very happy with that.”

He added that CTG is not rushing the issue as it would be over a year before any changes were made, because HMRC has promised to allow existing design and build contracts to come to an end before enforcing the requirement.