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Restriction on use or disposal

29th May 2018
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Developers of new dwellings generally assume their works of construction or conversion are properly zero-rated. This is not always true.

Legislation provides that definition of a dwelling for VAT purposes. This is found in Note 2 of zero-rated Group 5.

“A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied—

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.”

Unless the resulting structure fulfils this definition, the works of construction or conversion cannot be zero-rated (or reduced-rated). And the onward sale or long lease becomes exempt instead of zero-rated.

In my experience, the third provision causes most difficulties. This is frequently so in relation to D-I-Y building projects. The Upper Tier has found in favour of HMRC in the cases of Burton ([2016] UKUT 20) and Shield ([2014] UKUT 453), and these decisions have affected numerous claimants.

The most recent ‘Note 2(c) decision’ is more helpful. The taxpayer was Summit Electrical Installations Ltd, and the project involved the construction of student accommodation for Leicester University. The Tribunal took a lot of time to review previous decisions, including those two I have mentioned.

Comment was made that the earlier decisions concerned the prohibition on use of the premises in question separate from the use of some other specific land or premises. This is an essential point which was previously discussed in Shields.

In Summit, the Tribunal quoted in full the relevant condition within the planning permission. The key extract seems to be: “Other than staff associated with the management, 35 maintenance and security of the development, no person other than a full time student attending the University of Leicester or DeMontfort University (or such other higher/further educational establishment as may be agreed in writing by the local planning authority) shall occupy these flats at any time.”

 The Tribunal commented that there was no reference within this condition to a particular building or premises. Although the FTT did not make any reference to the proximity of the development to the premise(s) of the University, there is no reason why there might not be some considerable distance for students to travel. And, the Upper Tier added, the University might move! Further, the development might also be occupied by students of other higher/further educational establishments in the future. Since occupation of the resulting units was not restricted to persons using a specific building, the conditions for zero-rating were fulfilled.

Whether HMRC wish to appeal further remains to be seen!

https://assets.publishing.service.gov.uk/media/5afef0ffed915d06604a112f/HMRC_v_Summit_Electrical_Installations_Ltd.pdf

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