HMRC has changed the policy on the VAT treatment of a dwelling formed from the construction of more than one building or from the conversion of non-residential buildings into a dwelling, following several wins for taxpayers over challenges to its original position at the First Tier Tribunal (FTT)
Previously, HMRC took the view that while a building could contain more than one dwelling, a dwelling could not be formed from more than one building. This was based on Group 5 of Schedule 8 of the VAT Act 1994 which refers to ‘a building designed as a dwelling’, which HMRC considered precluded more than one single building from constituting a dwelling.
However, it was decided in the FTT cases of Mark Catchpole and Mr T Fox that for the purpose of Group 5, it was appropriate to interpret the law as allowing the construction of dwellings formed from more than one building to be eligible for zero-rating.
HMRC, having accepted this decision, says it now agrees that hat single dwellings can be formed from more than one building, and considers that this also applies, in principle, to some conversions.
The briefing makes clear that the law does not require a dwelling to be formed from a single building. A number of buildings may be combined to form a single dwelling as long as they are designed to function together for that purpose.
In order to be eligible for the VAT zero-rate, the buildings must meet all of a number of conditions. The first is that the development must meet the conditions of the existing definition of a ‘building designed as a dwelling’ and to this end ‘building’ can mean more than one building.
In addition, all buildings must be constructed or converted under a single project and under a single consent. If a new dwelling that is made up of more than one building is constructed in stages, these subsequent stages will be viewed as annexes to the original building, which will not benefit from the zero-rate unless the buildings are on the same site and the stages are completed with no unreasonable delay between them.
In such circumstances, it is a requirement that none of the buildings are occupied until all the stages are complete.
Where more than one building is designed jointly to be a single dwelling, their construction will be eligible for zero-rated relief so long as it satisfies the following conditions:
- the dwelling consists of self-contained accommodation, but it is not necessary for each of the buildings to be a dwelling in its own right, for example, the bedrooms could be in one building and daily living accommodation in another
- there is no provision for direct internal access from the buildings forming the dwelling to any other dwelling or part of another dwelling
- the separate use, or disposal of the dwelling (comprising more than one building), is not prohibited by the terms of any covenant, statutory planning consent or similar provision
- statutory planning consent has been granted in respect of that dwelling and its construction or conversion, resulting in a dwelling formed by more than one building, has been carried out in accordance with that consent
Where a building, designed as a dwelling, has been constructed at the same time as another building and jointly the two are not to form a single dwelling but rather to form a dwelling and an unattached annexe (which is identified as such on the planning documents) zero-rated relief will be restricted to the building that is a dwelling.
Where work is undertaken to convert premises consisting of more than a single building into a dwelling (for example, where premises are being converted to a different residential use), HMRC now accepts that it would qualify for the reduced rate (5%) of VAT.
HMRC says that anyone who has constructed or converted eligible buildings into new dwellings, consisting of more than one building that have not previously been treated as zero-rated (for example, works of construction and eligible conversion services) may submit claims for overpaid VAT with retrospective effect up to four years from the date of the publication of this brief.
However, HMRC warns it may refuse claims where the claimant would be ‘unjustly enriched’ as a consequence.
The FTT ruling in the case of Mark Catchpole TC 01995 is here.
The FTT ruling in the case of Mr T. Fox (TC 01957) is here.
