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HMRC internal manual

VAT Construction

Changing the use or disposing of certificated buildings - buildings completed on or after 1 March 2011: scenarios involving buildings used for a residential purpose

A new building was purchased at the zero rate for £5m from a developer by a company that intended to use the building as a care home.

 
 
 

Scenario 1

After five years, in order to raise capital, the company grants a long leasehold interest (for a premium) to a finance company. The finance company leases the building at an open market value rent back to the company, who continues to use the building as a care home. Will the operating company have to account for a self-supply charge?

No. Because the operating company continues to use the building for a qualifying purpose, there has been no ‘change in use’.

Scenario 2

As but, after five years, the company leases part of the building to a charity to use as a day care centre. Users of the day care centre won’t be charged by the charity. Will the operating company have to account for a self-supply charge?

No. Although a ‘change in use’ has occurred, no self-supply charge will be triggered because the building continues to be used solely for a qualifying purpose albeit a relevant charitable purpose rather than a relevant residential purpose.

Scenario 3

After five years, the care home is converted into apartments. Will the operating company have to account for a self-supply charge?

Yes. There has been a ‘change in use’ and a self-supply charge will need to be accounted for. The VAT due will be £500,000, calculated as follows:

  • Value of original supply or supplies that would have yielded £1 million VAT equals £5 million.
  • Proportion of the building affected by the change equals 100 per cent.
  • Number of months remaining in the 10-year period that this part of the building won’t be used for a relevant charitable purpose equals 60 months out of 120.
  • Value of self-supply is £5 million multiplied by 100 per cent multiplied by (60 divided by 120) equalling £2.5 million.
  • VAT at 20 per cent equals £500,000.

Of course, if taxable supplies are made of the apartments, then the VAT on the self-supply will be deductible as input tax.