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Concession allowing non-student use of accommodation by universities during holiday time to be withdrawn, but positive news on 'dwellings'

UPDATED: HM Revenue and Customs (HMRC) is to end its practice of allowing universities and other higher education institutions (HEIs) to ignore how designated student accommodation is used during holiday periods for the purposes of VAT rules, it has announced. The withdrawal of the concession comes at the same time as a number of other important announcements relevant to VAT on student accommodation, which will be of great interest to HEIs and private sector providers alike.

The concession will be withdrawn from 1 April 2015 along with others identified during a recent review (23-page / 241KB PDF) as being outside the scope of HMRC's discretion to make concessions that depart from the strict interpretation of the relevant tax laws. For existing buildings and new buildings where the VAT “trigger point” falls before 1 April 2015, there will be grandfathering provisions which will allow the concession to continue to be applied. Private sector providers have never been allowed to rely on the concession.

The change will prevent some new student accommodation from qualifying for 'zero rating' for VAT purposes. In the absence of the concession, the VAT rules require the building to be used 'solely' as residential accommodation for students (‘relevant residential purpose’ or RRP) regardless of whether that use is during term time or holidays, which in practice is interpreted as 95% or more student occupation. Many HEIs make commercial use of their accommodation during holiday periods, but following withdrawal of the concession that use cannot be ignored in applying the ‘solely’ test.

However, some student accommodation could now be classed as 'dwellings' and so qualify for zero-rating regardless of the level of student use under new guidance published by HMRC. Previously HMRC had been extremely reluctant to accept that student accommodation could be ‘dwellings’ for VAT purposes, instead requiring HEIs and other student accommodation providers to fall within the RRP rules in order to obtain zero-rating. This new announcement therefore represents a significant boost for HEIs and private sector providers alike, as (if the building can meet the requirements for being classified as ‘dwellings’) this could enable zero-rating and other VAT advantages to be obtained whilst generally allowing for the building to be used more flexibly.

The first grant of a major interest in a new dwelling or building intended for RRP use is generally zero-rated for VAT purposes. This means that although VAT is not charged on the grant, the significant VAT costs incurred during its construction can still be recovered. This treatment is crucial to the financial modeling of most student accommodation projects.

Zero-rating of dwellings is based largely on the design of the building, while zero-rating of RRP buildings is based on their use. According to its new guidance, HMRC will now allow buildings that could qualify for zero-rating under both of these provisions at the same time to "rely on either provision" in order to achieve zero-rating.

According to HMRC's guidance note, planning permission will not necessarily determine the VAT treatment of buildings that are designed as dwellings and used as student accommodation. Developers will also be able to use both criteria interchangeably; so, for example, zero-rating the supply of construction services under the RRP heading will not prevent the developer from later relying on its design as a dwelling.

Under VAT rules, dwellings must consist of self-contained living accommodation and must not contain provision for direct internal access to any other dwelling or part of a dwelling. There must be no prohibition against the separate use or disposal of the dwelling, and statutory planning consent must have been granted for its construction. HMRC's guidance states that the tests will cover studio or 'cluster' flats used as student accommodation. In contrast, accommodation consisting of individual bedrooms and en-suite rooms is not likely to meet these requirements. This may lead to an increased proportion of cluster flat developments in the future.

HMRC has also recently tightened its definition of the term 'student' for the purposes of the RRP tests, as set out in new guidance published earlier this week. The new guidance restricts the term to cover an individual that has "left school and is in higher or further education or training at a college, academy or university with a view to obtaining a generally-recognised academic or professional qualification or maintaining an existing professional qualification for which accreditation is received". Previously, the term was defined widely enough to cover anybody engaged in a course of study or instruction. As the withdrawal of the vacation concession means that the importance of ‘student use’ of (non-dwelling) buildings throughout the year will be paramount, this change represents a further potential headache for HEIs in considering the use of their accommodation.

Editor's note 07/02/14 This story was updated to reflect other recent changes to VAT on student accomodation.

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