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HMRC internal manual

VAT Construction

‘Relevant residential purpose’ - interpretation of terms: category (d) - residential accommodation for students or school pupils: concession for Higher Education Institutions, mitigating the effect of ‘solely’

If the ‘solely’ requirement of the law was applied strictly, the use of student accommodation by occupants other than students during off-term or vacation time would mean that construction services incurred in the construction of the student accommodation wouldn’t benefit from zero-rating.

In addition, the recovery of VAT incurred on construction costs would be restricted because the accommodation would be used for exempt educational purposes and for taxable or exempt non-educational purposes.

This VAT position presented commercial difficulties for universities constructing and operating student residences since they wanted to make profitable use of student accommodation in off-term or vacation time and still get the benefit of zero-rating of construction costs.

Following discussions with the Committee of Vice-Chancellors and Principals of the Universities of the United Kingdom (CVCP), a concession was granted that allowed Higher Education Institutions (HEIs) to disregard the ‘solely’ provision in such situations.

The effect of this allows the solely requirement in Item 2 to be read as ‘solely in term time’ in circumstances where student residences, constructed primarily for use as student accommodation are put to use by students and occupants other than students during off-term or vacation time.

The purpose of the concession was therefore to enable HEIs to make profitable use of their student accommodation in vacation periods (when students don’t use student residences) and still get the benefit of zero-rating within Group 5.

The CVCP concession was originally contained in a document known as ‘the Concordat’, issued by the CVCP dated 30 March 1990 although this was withdrawn with effect from 1 September 1997. However, the treatment of student accommodation is still preserved by HMRC despite this.

Unfortunately, the problem which arose is that, although the original purpose of the concession was that it only applied to accommodation built and operated by HEIs, there was nothing in the language of the concordat to indicate that the university couldn’t use a third party.

This particular point was challenged by the University of Greenwich in the High Court (R (oao Greenwich Property Ltd ) v C&E Commissioners, Ch D [2001] STC 618; [2001] EWHC Admin 230) after they licensed the building to a subsidiary company during the summer to make the summer lets, but Customs denied zero-rating on the grounds that the CVCP concession only ignored summer lets by HEIs.

The outcome of that review by the High Court was that the concession could apply even if a non-HEI made the summer lets.

As a result of this, we maintain that the CVCP concession can apply where a building is leased to the HEI for 52 weeks a year and a third party arranges the sublets for the non term time. If the building is only leased to the HEI for 40 weeks and the remaining 12 weeks are leased to others during non-term time then the CVCP concession wouldn’t apply.

In other words, it has to be the HEI that is making the ‘summer lets’ and not an SPV. As long as the agreement is that the SPV is making the building available for use to the HEI and then the HEI makes it available for non term time that is satisfactory.

Where the SPV makes the building available for use by the HEI for 40 weeks and then has the right to let for the remaining 12 weeks in its own right then the CVCP concession wouldn’t apply and the building wouldn’t be a relevant residential purpose one.

Note: The concession can only be used by providers of higher education (colleges and universities). It does not apply to schools or other providers of education or training.