VAT cash flow savings opportunity for contractors of residential buildings

A recent First Tier VAT Tribunal decision should result in main contractors involved in residential building projects, such as student accommodation or care homes, being in a better VAT cash flow position.
Historically, only main contractors have been allowed by HMRC to zero-rate construction services on new communal residential buildings, including student accommodation or homes/ institutions providing residential accommodation for children.  This is due to HMRC’s policy that zero-rating does not extend to construction services provided by sub-contractors.  The Tribunal Judge dismissed HMRC’s policy as being entirely wrong.
The recent VAT Tribunal case found that student accommodation qualified for VAT purposes as “dwellings” – finding in favour of the main contractor who refused to pay VAT on the subcontractor’s services because this was the construction of dwellings and therefore zero-rated.
This is great news for those main contractors engaged in student developments or other residential schemes as they will no longer have to fund the VAT on charges by sub-contractors before reclaiming it from HMRC, therefore representing a significant cash flow boost.
It is hoped that in due course, HMRC will acknowledge this ruling to provide certainty for the construction sector.
If you’re currently involved in a construction project, and you’re unsure of the treatment of VAT, it is always wise to take the professional advice of a VAT expert. In many cases we’ve seen instances where contractors have been overpaying VAT unnecessarily, having a negative impact on their cash flow. Good housekeeping in this area is often overlooked area but can add real value to any business.

This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.