Planning Permission and VAT: The Devil is in the Detail
There are valuable VAT zero-ratings for the construction of a ‘dwelling’ for VAT purposes, and another for the sale of a freehold, or long lease (over 21 years) in a newly constructed or converted dwelling.
Zero-rating means that no VAT is due on the supply (i.e. the purchase of the house by the customer) but unlike other transactions in the land and property sector, VAT on costs can be recovered in full, which is beneficial to the supplier, both in terms of cash flow, and in absolute terms.
For the relief to apply, certain criteria must be met, and a number of the criteria focus on planning permission.
If the build doesn’t go to plan (pardon the pun) or isn’t exactly in line with the planning permission granted by the planning authorities, then often the work will fail the ‘dwellings’ test and the work won’t qualify for relief.
Cowgills’ VAT Director Gemma McCaldon-Gower gives us some recent, real-life examples where developments haven’t gone to plan, which created potential significant VAT implications.
Planning permission and VAT: Example 1
Our client applied for planning permission to knock down and rebuild a property. Planning consent was given, conditional on retaining the front façade of the building, which has architectural significance in the local area. During the build, the façade collapsed. The architect secured agreement with the planning department to waive the planning condition, and that a new planning permission was not required for this change.
The VAT Act 1994 defines a dwelling as satisfying the following condition:
statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent
In this example, official planning permission permitted the construction of the building on the condition that the façade was retained. Whilst the change to planning permission was agreed with the planning department, the official decision was not amended, and for VAT purposes, the ‘construction or conversion has not been carried out in accordance with the planning consent’. Therefore the dwelling test is not met, and the building work was not zero-rated, creating an additional charge to the Developer.
Planning permission and VAT: Example 2
Another client applied for planning permission to construct a block of residential units, with a view to let the apartments out to nurses, doctors and other key workers working away from home, under short to medium term lets (6-9 months). Planning permission was granted for the build, but a condition of planning consent was that the property could not be used by any one person for any more than 180 days in a calendar year.
Broadly speaking, for VAT purposes if a building satisfies all of the usual criteria, and is constructed to the standards of a dwelling, the construction can benefit from zero-rating regardless of the use to which it is actually put. However, according to The VAT Act 1994, the onward supply of certain buildings is not zero-rated, if:
(i) the interest granted is such that the grantee is not entitled to reside in the building or part, throughout the year; or
(ii) residence there throughout the year, or the use of the building or part as the grantee’s principal private residence, is prevented by the terms of a covenant, statutory planning consent or similar permission’.
Essentially this part of the legislation attempts to block the zero-rating of the onward supply of buildings which are to be used as holiday accommodation, but could have unintended consequences.
For example, it could equally prohibit the relief applying to properties which are genuinely used as a person’s main residence (which the draftsman intended to qualify for relief).
In this example, the planning condition prohibits the use of the building on both of criteria (i) and (ii) above, and therefore the onward sale would not be zero-rated, potentially creating an additional VAT charge to the grantor.
What can we do to protect our position?
The VAT rules for property and construction are complex, and this area of VAT is littered with litigation.
It’s imperative that businesses take specific VAT advice when embarking on a project to both understand the implications of the project and understand where there may be irrecoverable VAT that needs to be budgeted for. It may be possible to restructure developments to improve the VAT position, but early planning is key.
Further, the scope for errors in this field is significant, especially with developments which involve a number of different types of development from a VAT perspective (a new build element together with a conversion for example). Errors can lead to penalties from HMRC, as well as unintended VAT charges which are often irrecoverable.
If you would like to understand how VAT may impact your development, and whether there are opportunities to improve the position, speak to Gemma or your usual Cowgills contact.
Cowgills is a leading independent firm of Chartered Accountants and Business Advisors in the North West of England – from Greater Manchester to Liverpool. We use our sector experience to deliver tailored financial solutions and support for businesses.
Get in touch with our Head Office in Bolton, Greater Manchester, for any advice on planning permission and VAT on 01204414243.
The information was correct at time of publishing but may now be out of date.