The VAT People's View: Dwellings and Zero Rating

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The recent case of Northside Management Ltd (NML) highlights the need to consider whether there are any restrictions imposed when a dwelling has been constructed as they could exclude the dwelling from zero rating.

NML held the freehold interest in a hotel and decided to convert the hotel to create new dwellings and sell four dwellings on 125 year leases.  The planning permission stated that there was a two month restriction on occupation of the dwellings and the leases were therefore drafted to include this restriction. 

Note 13 of Group 5 of Schedule 8, VATA 1994  excludes from zero rating dwellings where –

  1. the interest granted is such that the grantee is not entitled to reside in the building or part, throughout the year; or
  2. residence there throughout the year, or the use of the building or part as the grantee's principal private residence, is prevented by the terms of a covenant, statutory planning consent or similar permission.

In spite of the above legislation NML zero rated its supplies and HMRC subsequently assessed for VAT at the standard rate as the properties had a restriction on occupation.  At the time of the assessment the planning permission had been relaxed to one month and an application had been made for permanent residential use, this change to planning permission was subsequently granted.

NML argued that the time of supply was not when the leases were granted but at a later date when the liability was determined, The tribunal was not satisfied that that retrospective permission had been granted and stated that even if it had at the time of the supply for VAT purposes  a valid restriction was in place. The taxpayer’s appeal was therefore dismissed.

Whilst the case addresses a specific issue regarding time of supply and retrospective application of planning permission the case also serves as a reminder not to automatically assume that as a property is a self-contained residence that zero rating can apply on the first grant of a major interest; careful consideration should be taken to understand whether there are any restrictions on the occupation/use of the property and whether at any point in the near future these restrictions intend to be reviewed / changed.

Lindsay Gibbons is a consultant at The VAT People and can be contacted here or by telephone on 0161 477 6600.

David Miller is a director of The VAT People and can be contacted here or by telephone on 0161 477 6600.

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