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HMRC internal manual

VAT Land and Property

Holiday accommodation (Item 1e): dwellings with a restriction on all-year occupation

UK law taxes new dwellings, and ground rents and service charges paid for dwellings, if the purchaser cannot legally live in the building throughout the year. For example, residence in the dwelling may be forbidden for one or two months each year as a result of a restriction in the lease, or a restriction imposed by the local planning or similar authority. The legal basis for the taxation of such supplies is VATA 1994 Schedule 9 Group 1 Item 1 Exception (e) and Note 11.

In the Tribunal case of Mrs Barbara A Ashworth (VTD 12924), the Tribunal held that a restriction on all-year occupation is not in itself sufficient to treat the property as a holiday home and therefore tax the new dwellings and ground rents and service charges. The tribunal took the view that the introduction of Note 11 was an excessive exercise of the power given under the tailpiece of by what is now Article 135(2).

Following the above case HMRC accepted that in some instances where there was a restriction on all year occupation imposed by a developer or planning authority supplies of the dwelling, including service charges and ground rents, could still be exempt where the following applied:

  1. the dwelling was not on a development which was as a matter of fact a holiday or leisure site or one that was marketed as such, and
  2. there was not a restriction imposed by a developer or planning authority that prevented the dwelling from being used for anything other than a holiday or second home (in other words as someone’s principal private residence).

However, as a result of more recent case law, in particular Colaingrove Ltd ([2004] STC 712), HMRC now takes the view that, for the purposes of the exemption, the UK is entitled to distinguish between different types of property on the basis of permitted use. It follows that in cases where grants are subject to Schedule 9 Group 1 Note 11 (the occupier is prevented from residing in the property throughout the year) the accommodation is to be treated as holiday accommodation regardless of how the property is held out or the actual use made by occupiers.