21 July 2017

VAT and student accommodation

The VAT rules associated with the construction of student accommodation are not as simple as they appear. Contractors and landlords, be aware!

The VAT rules associated with the construction and use of student accommodation have become more complicated in recent times. As such, before any construction work begins, it is important contractors and landlords are aware of how the property will be used in order to ensure that VAT does not become an irrecoverable cost.

Construction of student accommodation

The construction of new student accommodation is liable to the zero-rate of VAT in the following circumstances:

  • If the property will be used solely for a relevant residential purpose (RRP). The term ‘solely’ is interpreted as at least 95% by HMRC; or
  • Where the property is designed as a dwelling.

Given the nature of student accommodation, some buildings can qualify for zero-rating simultaneously under both of the above rules. These rules are important because when the use of the building changes, the RRP rule above can result in an additional VAT cost.

Where student accommodation is zero-rated under the RRP rules, associated or connected buildings can also qualify for zero-rate VAT when they are constructed at the same time, on the same site and are intended to be used together, e.g. an accommodation block and a catering block used solely in relation with the accommodation block (the ‘solely’ 95% test applies to the use of all these buildings).

If this is the case, contractors (and sub-contractors) must be aware of the importance of VAT certificates. Where new student accommodation is constructed under RRP legislation, the contractor must hold a signed declaration or certificate from its client that states the building will be used ‘solely’ for a RRP. The contractor can only zero-rate their construction services when they hold this document. Sub-contractors, on the other hand, cannot make use of this certificate, and are required to charge standard-rate (20%) VAT on their services to the main contractor.

However, if the new student accommodation is constructed under the definition of a new dwelling, no declaration or certificate is required to confirm the use of the building and both the contractor and sub-contractors can zero-rate their construction services. In some cases this may reduce the cash flow costs associated with building projects.

Use of the building

The use of the new building should always be confirmed prior to the construction work beginning. This should ensure that, if there is a change to the use of the building or it is disposed of within 10 years of being constructed, the VAT position will be known and can be budgeted for.

For example, often landlords decide to rent out student accommodation during non-term time to gain further income. Doing this, however, may result in the ‘solely’ test no longer being met and a self-supply charge being applicable, which is based on a percentage of the VAT originally saved through zero-rating.

In this case, the VAT due on the self-supply is the VAT that would have been due on the original zero-rated supply (had it not been zero-rated) and discounted by 1/120th for every whole month since the building (or the part that qualified for zero-rating) was completed.

To put this in context, if the VAT that would have been incurred was £1 million (had zero-rating not applied), and the liability arises exactly five years after completion, then the VAT due on the self-supply could be £1 million x (120-60)/120 = £0.5 million.

We have assisted many clients with enquiries of this kind, and other construction-related VAT queries. Early advice helps to ensure that there is no unbudgeted VAT cost and that the cost of irrecoverable VAT is reduced wherever possible.

If you would like further information on any of the issues discussed above, please contact Scott Craig or Scott Berry on 0131 473 3500.

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