Clarity for sub-contractors VAT and student accommodation

18 September 2017

There was a seismic change in VAT policy relating to student accommodation in 2014, which resulted in confusion and mistakes being made by contractors. A recent case, “Summit Electrical Installations Ltd” challenged HMRC’s policy and clarified the VAT position. MHA MacIntyre Hudson is delighted to have represented the tax payer at the Tax Tribunal, with our VAT litigation Director Glyn Edwards taking the case to a successful outcome.

The case – RRPs or dwellings?

The appeal concerned the VAT treatment of electrical services provided by Summit Electrical Installations Limited, sub-contractors at a new build student site in Leicester. The main contractor, Create Construction Limited had received a certificate from the developer claiming relief from VAT on the basis that the new building would be used for a relevant residential purpose (RRP), i.e. a communal building for students. Ordinarily sub-contractors working on RRP buildings are not entitled to zero-rate their services - VAT has to be charged at 20% which the main contractor must then reclaim on a VAT return.

However, like most modern student blocks, the units were designed as self-contained living accommodation including kitchenettes and en-suite bathrooms. While the planning consent restricted use to students, there was no clause preventing each unit from being separately used or sold. Create Construction refused to pay VAT on Summit’s services, on the basis that that this was the construction of dwellings and should therefore be VAT zero-rated.

The tribunal’s decision 

The tribunal agreed that the student accommodation could be treated as ‘dwellings’ for VAT purposes. HMRC unsuccessfully argued that restricting occupation to students was a restriction on the separate use of each unit.

The tribunal then considered HMRC’s published policy which is that subcontractors must charge VAT if a certificate has been issued to the main contractor claiming zero-rating under the RRP relief, even if the construction would also meet the definition of dwellings. The judge dismissed that policy as entirely wrong.

What this means

Increasingly the change to the “designed as dwellings” test, has lent itself to developers being reluctant to issue RRP VAT certificates. This then leaves the main contractor in a perfect VAT storm as follows;

  • The main contractor has to be certain that the works qualify as dwellings, to enable him to zero-rate construction services;
  • Sub-contractors insist on charging VAT on the basis that this is HMRC’s published policy and the safest position for them to take; and
  • HMRC cracking down on VAT being charged incorrectly, the risk for the main contractor being that VAT recovery is denied.

Therefore, the decision creates certainty and significant cash flow savings for student accommodation main contractors.  It also provides comfort for sub-contactors working in this area.

To discuss VAT in this complex area please call Alison Horner or send us an online enquiry.