HMRC’s VAT policy on new build student accommodation has been successfully challenged in a case taken to the Tax Tribunal by Glyn Edwards, VAT Director at MHA MacIntyre Hudson.
The case should bring significant cash flow savings for student accommodation contractors, although the application of the landmark judgement will depend on the precise circumstances of each development around the wording of planning consents.
The appeal concerned the VAT treatment of electrical services provided by Summit Electrical Installations, sub-contractors at a new build student site in Leicester.
Main contractor Create Construction 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 – communal building for students.
Usually subcontractors working on RRP buildings are not entitled to zero-rate their services.
This means VAT has to be charged at 20% which the main contractor must then reclaim on a VAT return.
Like most modern student blocks, the units were designed as self-contained living accommodation including kitchenettes and en-suite bathrooms.
Crucially while the building planning consent restricted use to students, there was no clause preventing each unit from being separately used or sold.
On the basis that the project was the construction of dwellings and should therefore be VAT zero-rated, Create Construction refused to pay VAT on Summit’s services.
HMRC argued that restricting occupation to students was a restriction on the separate use of each unit.
But the tribunal agreed that the student accommodation could be treated as ‘dwellings’ for VAT purposes.
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.
Glyn Edwards, VAT Director at MHA MacIntyre Hudson, said: “The tribunal’s decision was a welcome relief for Summit Electrical Installations, but the principal winner in the dispute is Create Construction.
“Create Construction has numerous sub-contractors in exactly the same position, and so faced the prospect of having to finance VAT payments to all of them on a multi-million pound development.
“We hope that HMRC will now acknowledge the inaccuracy in their published policy on this type of buildings, as it has created considerable uncertainty in the construction sector.”
