Student Accommodation – Dwelling or Relevant Residential Purpose?
VAT reliefs are available for two types of residential building – those designed as dwellings and those intended to be used solely for a relevant residential purpose (“RRP”). Given the nature of student accommodation, a new building could potentially qualify for zero-rating simultaneously under both of these definitions. Whilst this may not appear to cause a problem at the outset from a VAT perspective (because zero-rating construction may be achieved under both definitions), it is important to distinguish between the two because of the additional monitoring requirements and rules under the RRP definition.
When a building is designed as a dwelling, not only can the main contractor zero-rate their supplies to the developer, but this relief also extends to the services of sub-contractors. Services provided by contractors and sub-contractors in the course of constructing a dwelling (or number of dwellings) can qualify for zero-rating regardless of who they are provided to.
When a building is intended to be used solely as a RRP, zero-rating cannot extend to the services of sub-contractors and is only available for the services provided by the main contractor to the intended user of the building. This user must certify its intended RRP use to the main contractor prior to the works commencing. The effect of this is that any services provided by sub-contractors to the main contractor will attract VAT at the appropriate rate. This presents a potential cashflow issue for the main contractor, who would only be able to recover this VAT charged by the sub-contractor via their periodic VAT return.
There are also additional monitoring requirements for RRP buildings. The intended use of a new building should be determined before construction works commence, and this intention is communicated to the contractor(s) to confirm the VAT liability. Therefore, when a new building is intended to be used solely as a RRP, this intended use must be monitored over a 10 year period to ensure the intention is fulfilled. If the intention or actual use of the building changes during this 10 year period, for example it is no longer used solely for RRP, the taxpayer will potentially be liable to a VAT charge. These monitoring requirements do not apply to buildings designed as dwellings.
Therefore, where a choice between the two definitions is available, it appears more beneficial to fall within the definition of a building designed as a dwelling. This allows for zero-rated construction services to be extended to sub-contractors and does not require monitoring of the building’s use following completion.
In the recent case of Summit Electrical Installations Ltd, the Upper Tribunal dismissed HMRC’s appeal, finding that student accommodation could still qualify as a dwelling despite planning restrictions on eligible tenants. The tribunal also determined that if a RRP certificate has been issued by the end user to a contractor, this does not prevent a sub-contractor from being able to treat the building as designed as a dwelling and hence zero-rating its supplies on that basis.
If you would like to discuss these rules or the impact this case has or may have upon your business, please get in touch with a member of the Centurion VAT team of 01633 415390 or firstname.lastname@example.org.
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