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HMRC policy on VAT and student accommodation is wrong, says Tribunal

There is "absolutely no basis" for an HM Revenue & Customs (HMRC) policy that the VAT treatment of supplies made in relation to a building by a sub-contractor depends upon the treatment adopted by the main contractor, the UK's First-tier Tribunal has decided in a case concerning student accommodation.

“The decision in the case is a real boost for student accommodation contractors engaging sub-contractors, offering them significant cash flow savings as it could mean they will no longer have to fund a 20% VAT liability for accommodation,” said Christine Yuill, a tax expert at Pinsent Masons, the law firm behind Out-Law.com.

Summit Electrical Installations acted as an electrical subcontractor on the construction of a block of student studio flats. It claimed that its supplies were zero rated on the basis that the flats were designed as dwellings. However, the main contractor provided a certificate to Summit certifying that the developer intended to use the flats for a relevant residential purpose (RRP), namely student living accommodation.

HMRC argued that the buildings were intended for use for a RRP as this was the treatment the main contractor had adopted in accordance with the certificate issued by the developer. HMRC argued that this meant that Summit's supplies were standard rated as RRP zero rating does not apply to supplies made by sub-contractors.

The supply, in the course of construction of a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose, of services related to the construction subject to certain exceptions, is zero rated. This is set out in Note 2 of Group 5 of Schedule 8 of the Value Added Tax Act 1994.

Note 4 of Group 5 provides that use as residential accommodation for students is a RRP. However, for supplies to be zero rated under the RRP limb, they cannot be made by a sub-contractor and a certificate has to be issued confirming the intended use of the property. 

Judge Amanda Brown said the tribunal accepted Summit's argument that HMRC’s policy to deny zero rating where both note 2 and note 4 applied was wrong on the basis that if a building can be zero-rated because it is designed as dwellings, then the sub-contractor is entitled to apply that relief, irrespective of whether it also qualifies as ‘relevant residential’ because of the issue of a certificate further up the supply chain.

"Any subcontractor can establish for itself whether the building that it is constructing meets the conditions of note 2.  If the building meets those requirements the sub-contractors supplies will be zero rated", she said.

HMRC also argued that dwellings treatment was not available in this case because the condition contained in Note 2(c) of Group 5 of Schedule 8 of the VAT Act was not satisfied. It argued that the condition that "the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision" was not satisfied because a planning condition restricting use of the flats to students of Leicester and DeMontfort Universities.

The judge said that the planning condition limiting the class of user of the flats to students at specific universities was not a prohibition of the type envisaged by the legislation, as it was not a link to specific land, which the Upper Tribunal had said was crucial for Note 2(c) to apply.

Christine Yuill said: "Judge Brown’s finding that a restriction in the planning permission restricting use of the flats to students did not prevent them being classed as dwellings for VAT purposes is very helpful and practical and contractors and subcontractors should always ensure that planning consents are carefully reviewed to ensure that all limbs of the dwellings test are met.”  

Although the decision is from the First-tier tribunal and so does not set a legal precedent that other judges must follow, Yuill said that if HMRC does not appeal the decision, it may lead to a review of their guidance.

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