VAT issues on new build student accommodation
In 2018, Summit Electrical Installations Limited successfully challenged HMRC’s VAT policy on new build student accommodation. Summit provided electrical services to main contractors working on student accommodation and had zero-rated its services on a new build development Primus Place which is in Leicester.
HMRC appealed the right of Summit to zero-rate its services and lost.
In theory, the whole matter could have been resolved without an appeal had Summit simply issued VAT only invoices to its customer who would have then been able to reclaim the VAT. The issue for Summit was that its customer refused to pay VAT on the works.
The main contractor at Primus Place had obtained a certificate from the developer-landlord claiming relief from VAT because the new building would be used for a relevant residential purpose (RRP) – a communal building for students. Sub-contractors working on RRP buildings must usually charge VAT at 20% on their services.
HMRC argued that Summit were not in the position of making a supply to the user of the student accommodation and therefore could not apply the VAT zero-rate.
Primus Place argued that student accommodation has changed hugely and nowadays the accommodation they were creating involved the construction of units which were designed as self-contained living accommodation including kitchenettes and en-suite bathroom facilities.
Summit therefore argued that the VAT zero-rate could be applied as they were working on ‘dwellings’. The relief for dwellings is broader than for RRP buildings and entitles both main and sub-contractors to zero-rate their services.
The decision by the Tax Tribunal demonstrates that zero-rated dwellings are capable of being constructed even where planning consent restricts occupation to students of universities so planners can be bolder in defining and limiting the class of residents of a new build development, without creating unexpected tax problems.
This outcome of this case will delight main contractors in the student accommodation sector because had HMRC won, main contractors would have been forced to pay VAT to subcontractors. Although this VAT would have been reclaimable, the amounts involved can be large and the impact on cash flow impact can be detrimental.
HMRC were to provide an outline of the legal analysis supporting the view that a building cannot be both a dwelling and RRP. To date, the outline has not been provided and further developments are awaited.
Meanwhile, it is not clear whether HMRC’s position in VAT Notice 708 and set out below, is correct, but normally it will make sense and will do no harm to assume that it is.
Where a contractor is constructing a building for a client that’s eligible to be built under Note 2 (dwellings) or Note 4 (RRP), HMRC expect the contractor to determine the liability of their supplies and those of any subcontractors based upon the actions of the client.
If the client gives a VAT certificate, then the building will be built under Note 4 and the sub-contractors supplies will be standard-rated. If no certificate is given, then the sub-contractors supplies are zero-rated.