Relief for the Construction Sector as HMRC’s VAT challenge on student accommodation fails
Contractors, developers, planners amongst others can now be assured that they do not have to pay VAT to subcontractors with regard to new build student accommodation. Despite HMRC’s best efforts to overturn the decision with regards to VAT relief on new build student flats, the courts firmly rejected their argument.
The case – what is a dwelling?
HMRC’s appeal concerned the VAT treatment of electrical services provided by Summit, sub-contractors at a new build student site in Leicester. Like most modern student blocks, each unit was designed as self-contained living accommodation including kitchenettes and en-suite bathrooms. Critically, the planning consent restricted use to:
...full time student[s] of Leicester or De Montfort University(or such higher/further educational establishments as may be agreed in writing by the local planning authority.
In HMRC’s view this represented a restriction on ‘separate use’ of each unit and therefore prevented them being treated as dwellings for VAT purposes. VAT rules require a dwelling to be capable of separate use and disposal. The HMRC argued that the use of these particular flats was tied to the use of university buildings.
The tribunal’s decision
The Court agreed that the student accommodation could be treated as ‘dwellings’ for VAT purposes. In the Judge’s view the ‘separate use’ test will only be failed if planning consent prohibits use of the premises separately from the use of other specific land or buildings. They therefore accepted the arguments made by Summit that the planning consent was merely a restriction on a category of users i.e. students.
HMRC argument was that there was a link to specific buildings i.e. that the planning restriction was implicitly referring to all the universities’ buildings and that this was sufficient to link the student accommodation to those buildings.
Why it Matters
Main contractors in the student accommodation sector will be delighted with the outcome in this case. If HMRC had succeeded in their arguments against Summit, main contractors would have been forced to pay VAT to subcontractors whenever planning consent referred to students of named universities. Whilst this VAT would be reclaimable, the amounts involved are large and the cash flow impact is significant.
The wider implications.
The alternative relief for relevant residential buildings, which allows main contractors to zero-rate new building work on student blocks is only available where the end-user certifies that a development will be used solely for student accommodation. This condition is breached if a landlord intends to let flats out to others during vacation periods. If HMRC had succeeded, this would place a landlord in the position of incurring VAT on the new build and being unable to reclaim this VAT due to VAT exempt lettings to students. The additional costs would make many developments unviable and the Courts confirmation that the wider relief for zero-rating of dwellings still applies will be very welcome.
The decision also helps those universities who want to use planning restrictions to ensure that there is sufficient local accommodation for students studying at their institution. A planning consent which only refers to ‘students’ is often insufficient, particularly in our largest cities where a very large number of students are competing for limited accommodation. Now that the Courts have confirmed that zero-rated dwellings are being constructed even where planning consent restricts occupation to students of named universities, planners can be bolder in defining and limiting the class of residents of a new build development, without creating unexpected tax problems.