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HMRC internal manual

VAT Construction

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‘Relevant residential purpose’ - interpretation of terms: distinguishing between buildings ‘designed for use as a dwelling’ and ‘used for a relevant residential purpose’

The construction of a building intended for use for a relevant residential purpose won’t qualify for relief if it isn’t used ‘solely’ for that purpose. As a result claims may be made that the building should be classified as a building ‘designed for use as a dwelling’.

If successful, a contractor won’t require a certificate from his client in order to zero rate his supplies (VCONST18000).

The Tribunal has confirmed in University of Bath (VTD 14235) that these are two distinct categories, and as such a distinction needs to be drawn between them:

It does seem to us that a deliberate distinction has been drawn between what one would ordinarily think of as a dwelling, whether a private house or a self-contained flat, and the kind of situation covered by Note (3) [now Note (4)]. As we see it, the draftsman in making use for a relevant residential purpose a separate category has done so intentionally, as he has with use for a relevant charitable purpose, and has provided for zero rating to apply in specific circumstances with, to some extent, their own rules. It is not a case of those categories being added, as in some instances of inclusive definitions, to bring in things about which there could be doubt even taking a wide view as to whether they are or could be included in the primary category. The strong impression given is that the draftsman was looking at the categories for which he was making provision as quite separate things. That impression is reinforced by Note (7) [now Note (13)] excluding from item 1 in certain circumstances a grant of an interest in a building designed as a dwelling, etc.

If the only permitted use is for student accommodation or as residential accommodation for members of the armed forces then that is how it should be classified and made subject to the certificate regime. This can be evidenced by planning permission being passed for student accommodation or a clause in the title deeds to the land restricting its use to student accommodation.

If there is no such restriction and the land is free to be developed for dwellings that meet the definition of designed as dwellings, they can be accepted as dwellings unencumbered by the certificate regime.

In Philip Thompson (VTD 15834), the appellant constructed in the grounds of his house a building with the initial intention of using it solely as accommodation for his children while they were school pupils or students. The Tribunal dismissed the idea that the building was to be used for a relevant residential purpose:

The terms of the planning permission require the new building to be used as a unit of occupation ancillary to the main household. If, as is the case, a member of the Appellant’s household moves into the new building and lives and studies there, in my judgment that does not turn the new building into ‘residential accommodation for students or school pupils’; in my judgement the new building is still being used, in accordance with the planning permission, for the purposes of the Appellant’s household. In my judgement, the Appellant’s eldest child is occupying the new building as being a child of the Appellant and part of the Appellant’s household rather than as a student or school pupil. In my judgement occupation of that kind does not qualify as use as ‘residential accommodation for students or school pupils’.

In Opal Carleton Limited (TC00635), which concerned the reduced rate, traditional student halls of residence were converted into cluster flats. Planning permission required the property to continue to be used as student accommodation. In rejecting the appellant’s claim that works amounted to a ‘changed number of dwellings’ conversion the Tribunal stated:

All the surrounding circumstances confirm that the development is of Halls of Residence for Students and has been originally constructed for occupation of that usage. As a result the Building Works were for the upgrading of the students units, which are relevant residential purpose and not a ‘dwelling’ within item 2 (1). Mr Puzey [for HMRC] is quite correct when he states it is not open to Opal to choose which of the headings suit it best. It is necessary to consider more than the ‘Physical Test’. It is necessary to decide what the real purpose of the Building Works is and what in substance they represent. If it were not so, as the meaning of ‘dwelling’ in the case law is now very wide, nearly any development could be brought within Item (2) ‘a changed number of dwellings’. For all the above reasons, we dismiss the appeal and VAT is to be paid at the standard rate.