On-going student projects can still enjoy zero VAT rating vacation concession under relaxed HMRC rules

Out-Law News | 09 Apr 2014 | 11:36 am | 3 min. read

On-going student accommodation projects which are not completed by 1 April 2015 and intended for commercial use in vacation periods will still be able to benefit from zero VAT rating providing they meet certain criteria, under a further relaxation of "grandfathering" rules announced by HMRC.

In January HMRC announced that it 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.

Under long-standing HMRC rules HEIs are able to secure a zero VAT rating on the construction of a building "intended to be used solely (at least 95%) for a relevant residential purpose".  To date new HEI accommodation has been able to secure the zero VAT rating even if it is used for other purposes during vacation time, including commercial use. However from 1 April 2015 HMRC will withdraw this vacation use concession. It is one of a number of 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.

Following discussions with affected parties, HMRC has now said that student buildings which are not complete as at 1 April 2015 will still be able to rely on this vacation use concession and secure zero VAT rating in certain circumstances.

According to revised HMRC transitional rules just published, the vacation use concession would still apply if the first supply of construction services is made before 1 April 2015 "and relates to a meaningful start to the construction of the building by that date, and the works are expected to progress to completion without interruption." HMRC said that in such cases, demolition or site clearance works will only be accepted where construction starts immediately afterwards.

The vacation use concession would also apply to projects not completed by 1 April 2015 if certain criteria relating to the financing of the projects are met.

For the first grant of a major interest in new student accommodation, this would require payment of a "meaningful deposit" to the vendor or their solicitor before 1 April 2015. Options to purchase will not be accepted, irrespective of intention, said HMRC. Alternatively an Agreement for Lease or purchase signed with the vendor or landlord before 1 April 2015 and "a meaningful start to the construction of the building has taken place by that date, and the works are expected to progress to completion without interruption (demolition or site clearance works will only be accepted where construction starts immediately afterwards)" would suffice.

The vacation use concession will only apply to on-going projects or those which are under development.

HMRC pointed out that there are no changes to the rules set out January in relation to the continued use of the concession for the purposes of the change in use charge. This means that projects which rely on the concession before 1 April 2015 will continue to benefit from the concession until the building is "no longer susceptible for consideration for a change in use charge" - typically ten years from completion.

Jon Robinson of Pinsent Masons, the law firm behind Out-Law.com, said: "The widening of the transitional rules will be welcome news for universities who have ongoing accommodation projects or new ones in the pipeline, where there will have been significant concern over the withdrawal of the vacation use concession. Typically a zero-rated leaseback to a university is not granted until practical completion of the residences – at least now a university will be able to rely on the concession in issuing a zero-rating certificate provided an agreement for lease and a meaningful start on construction are in place by 1 April 2015.

"The impact of failure to obtain zero-rating on student accommodation projects can be huge, and can call into question the financial viability of the entire scheme," said Robinson. "It is pleasing the HMRC has been willing to listen to genuine concerns over ongoing projects. However, universities will ultimately have to come to terms with the fact that the vacation use concession will no longer be available for new projects from April 2015. They will need to consider whether to build new residences as “cluster flats” and seek to take advantage of HMRC’s recent widened view of the scope of “dwellings” for zero-rating purposes, or possibly whether non-student use can be restricted to less than 5 per cent over the whole year including vacations."