31 August 2017

Student accommodation: a VAT note for contractors and landlords

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

In the world of VAT, the construction of and use of student accommodation have become more complicated over recent years. As such, it is important contractors and landlords consider exactly how the property will be used before any construction work begins, and thereafter, in order to ensure that VAT does not become an irrecoverable cost in the future.

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, a new building can qualify for zero-rating simultaneously under both of the above rules. At first glance, this point may seem irrelevant. However, it is important as, if the use of the building changes, the RRP rule above can result in an additional VAT cost.

Contractors and sub-contractors must be aware of the importance (or not) of VAT certificates. Where new student accommodation is constructed as a RRP property, the client must provide the contractor with a signed declaration or certificate that states the building will be used ‘solely’ for a RRP. The contractor can only zero-rate their construction services if 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 as a new dwelling, no declaration or certificate is required and both the contractor and sub-contractors can zero-rate their construction services.

Use of the building

The intended use of the new building should always be confirmed prior to the construction work beginning. If there is a subsequent change in that intention, it’s important to note that there may be a potential VAT charge or cost to the owner. The exact cost of this will depend on when the building was completed (within a 10 year review period) and what the building is now being used for.

For example, landlords often decide to rent out student accommodation to non-students during non-term time to gain further income. Doing this, however, may result in the ‘solely’ test for RRP buildings no longer being met. This could result in a VAT cost.

Over recent years there has been an increase in the number of students attending further and higher education institutions, and this has resulted in an increase in the amount of student accommodation being constructed. Given the values associated with these projects, it is crucial that the VAT position is considered prior to any work commencing and monitored thereafter. There are various VAT implications that should be carefully considered and we are always on hand to help.

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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