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HMRC loses restricted use VAT appeal

10th Jul 2018
VAT Exchange Limited
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Determining the VAT liability for building contractors or subcontractors can be confusing, especially when the correct treatment depends on an obscure note in the main legislation. Marie Stein reports on a case involving construction work on a restricted use building.  

The technical issue

The upper tribunal case of Summit Electrical Installations Limited [2018] UKUT 176 (TCC) was an appeal by HMRC against the decision of the first tier tribunal, about the VAT liability of construction services supplied in the course of construction of new student residential accommodation in Leicester.

Summit acted as a subcontractor to the main contractor, which issued a certificate confirming that the work qualified for the zero-rate as new construction of a property to be used for relevant residential purposes (RRP). 

However Summit’s VAT officer didn’t agree and assessed the company for under-declared output tax on the services concerned. The main contractor refused to pay VAT for the work because it believed that the zero-rate did apply and it would not be able to claim VAT incorrectly charged.

This long held interpretation that the zero-rate did not apply to construction work where the building use was restricted may have increased HMRC’s revenue over the years, but has very messy implications for the residential property sector.


Zero-rating for the construction of properties for RRP and other qualifying properties, such as dwellings, is allowed under VAT Act 1994.The trouble arises in the notes of Schedule 8, Group 5, Items 2(a) and 4, particularly Note 2(c), which says: “the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision.”

In Summit’s case, the building consent required that apart from building maintenance, management and security staff only University of Leicester or De Montfort University students should occupy the flats.

The issue

The issue was whether the stipulations in the building consent were sufficient to meet the requirements of Note 2(c). HMRC argued that the separate use of the property was prohibited because occupancy was restricted to students of certain universities. 

The upper tribunal disagreed and held that the building use restriction only applied to situations where the separate use or disposal of the property was linked to a particular building or piece of land, not, as in this case, attendance at a particular university. 

In this case, the constraint didn’t apply because residence of the new flats use was ONLY restricted to full time students at one of two universities, but NOT any particular building or campus.

The bigger picture

Thankfully the tribunal judges confirmed the established interpretation of Note (2)(c). But what if they had agreed with HMRC?

The effect on the construction industry would be significant, as main contractors would have to review previous contracts and issue VAT invoices to building owners and property developers for an additional 20% of the cost of construction work carried out up to four years ago. What would you do if you’re a property developer and you’re asked to pay an additional 20% VAT for work on a property that you’ve already sold or leased?

Either way, the businesses involved would be left to sort out the errors caused as a result of HMRC’s incorrect ruling.

The fact that the main contractor refused to pay VAT to Summit demonstrates the problems for businesses caught up in such situations. Businesses can only claim VAT that has been charged correctly, so the contractor was right to stand by its decision to issue a certificate. If it had paid the VAT and claimed it as input tax, it would have knowingly submitted an incorrect return. VAT issues for building contractors are already complicated without having to challenge an incorrect ruling.

Replies (1)

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By jimeth
11th Jul 2018 11:53

And VAT issues in Construction will only get more complicated and confusing for all concerned with the introduction of the reverse charge on 1 October 2019.

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