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HMRC internal manual

VAT Construction

Changing the use of certificated buildings - buildings completed before 1 March 2011: switching areas in a partly-qualifying building


The concession

Important note: The following concession was withdrawn on 1 July 2010.

Part I: Purpose of the concession

This ESC allows certain changes of use of parts of a building without a consequential VAT burden or advantage, where the use the building as a whole is substantially unchanged.

Part II: The concession

The concession applies to buildings in which one part is used for a relevant residential or relevant charitable purpose (‘qualifying use’) and another part is used for other purposes (‘non-qualifying use’). It applies if the part put to qualifying use was zero rated under Group 5, Schedule 8, Value Added Tax Act 1994, and the building was completed within the last ten years. When a change of use takes place so that one part is no longer put to qualifying use, but another part starts being put a qualifying use, the taxpayer need not account for VAT on the self-supply under paragraph 1(5) to Schedule 10 of the Act if all of the following conditions are met.

Part III: Conditions

Following the change of use, the part of the building used for qualifying use must be at least 80 per cent of the floor area of the original zero rated part and the taxpayer must expect that this condition will be satisfied until ten years after the building was completed;

Since the zero rated supply, any refurbishment of the last three years of all or part of the building must have refurbished all the exchange part of similar standard; and

This concession may only be used with the written agreement of the Commissioners.

In addition, where the concession above applies in respect of change of use:

(a) the taxpayer need not account for VAT on any deemed supplies relating to the building that arise under paragraph 5 of schedule 4 to the Act or article 3 of the VAT (Supply of Services) Order 1993 (SI 1993/1507), solely as result of the change of use;

(b) if part of building as a capital item under Part XV of the Value Added Tax Regulations 1995 (SI 1995/2518 regulations 112 to 116), the taxpayer need only account for tax due in respect of adjustments in subsequent intervals is to the extent necessary to give a fair and reasonable result in light of the use of the building as a whole in those intervals.

Part IV: Warnings

Where an attempt is made to use the ESC for tax avoidance, the Commissioners may withdraw or restrict its application.

Conditions of use

There are various conditions that must be met before the concession may be used. They are as follows:

  • That the new area that will be used for a qualifying purpose must equate to at least 80 per cent of the area that was originally zero-rated. This prevents the concession being used to get extra relief for non-qualifying use while allowing a degree of flexibility.
  • That if the building has been refurbished in the last three years, areas switched must have been refurbished to a similar standard (the standard of refurbishment needn’t be identical between the two areas but it should be clear that the switch isn’t being made to gain an unfair advantage).
  • That written agreement to use the concession must be obtained from us (the terms of this concession are complex: this condition is designed to give certainty).

Items covered by the Capital Goods Scheme

If the building were a Capital Goods Scheme item then an adjustment in subsequent periods would be required only to the extent that it produces a fair and reasonable result in light of the use of the building as a whole.

Deemed supply provisions

Where a business asset is used for a non-business purpose a deemed supply arises under Schedule 4 Paragraph 5(4). When this concession is used, the deemed supply provision is disapplied.


Example 1

A charity owns a building that was constructed for its use five years ago. At the time of construction it was agreed that the ground floor was going to be used for a qualifying purpose whilst the first floor wasn’t. As a result, it was agreed that 50 per cent of the construction costs could be zero-rated.

After five years, it is decided that the activity on each of the floors should be swapped. Without the concession, the charity would be required to account for VAT on the ground floor which no longer qualifies for zero-rating.

Under the concession no adjustment will be required.

Example 2

A charity has owned and used a building seven years when it decides to swap the use of the first and second floors. The first floor is currently used for a qualifying purpose whilst the second floor isn’t. The first floor has been refurbished to a very high level within the last six months. The second floor was refurbished to a similar standard 18 months previously.

Since the floors have been refurbished to a similar level within the last three years, the concession may be used.

Example 3

A boarding school constructs a new building. The purpose of this building is primarily to provide dormitory accommodation for pupils. However, the central part of the building is put to use as offices and classrooms. The building totals 3000 square feet. The qualifying area covers 2,200 square feet. The construction of this area is zero-rated.

Having used the building for a year, the administrators of the school decide that the conformation of the building is unsatisfactory and decide to swap one end of the dormitory accommodation with the offices and classrooms. Whilst coming to that decision, they also propose to increase the total number of offices. This results in the qualifying area now being reduced to 1,700 square feet to allow for the additional offices.

Although the qualifying and non-qualifying parts of the building have been switched, the new area which will be used for qualifying purpose is less than 80 per cent (1,760 square feet) of the original qualifying area and the concession can’t be used. A VAT adjustment will be required.