The reduced rate of VAT increased from 12.5% to 13.5% with effect from 1 January.
Generally, the purchase of a new house by a private individual involves two stages: the payment of a deposit at the time of signing the contract, with the possibility of staged payments as the house is being constructed and payment of the balance on completion.
Where a private individual or any other un-registered person makes a payment to a registered builder for the purchase of a new house the rate of VAT applicable is the rate in force at the time the payment was received by the builder. Therefore, any payments made during 2002 were liable at the 12.5% rate of VAT, and payments made on or after 1 January 2003 are liable at the 13.5% rate.
Thus, in cases where deposits and-or staged payments were made prior to 1 January 2003, it is only on the remaining balance that the increased rate is applied. In cases where contracts were signed, but no payments were made prior to 1 January 2003 the total cost of construction of the house is subject to VAT at the 13.5% rate.
I would not be in a position to comment on the actual terms of a contract entered into between the builder and the private individual concerned.