VAT - changes to zero-rating in relation to student accommodation

HMRC has announced important changes to its policy for zero-rating certain supplies of dwellings and buildings intended for use solely for a relevant residential purpose. The changes are likely to have a positive effect for taxpayers constructing new student accommodation but are likely to be less well received by Higher Education Institutions (HEIs).

The key changes consist of:

• a reversal of HMRC's previous policy which now, provided various conditions are satisfied, enables student accommodation to constitute both dwellings and a building intended for use for a "relevant residential purpose"; and
• the withdrawal, with effect from 1 April 2015, of an extra statutory concession, which currently enables HEIs to ignore commercial use of student accommodation outside of university term time when assessing whether a building is to be used solely for a relevant residential purpose.

VAT Information Sheet 02/14

The publication of VAT Information Sheet 02/14 is a significant departure from HMRC's previous policy regarding the zero-rating of newly constructed student accommodation, which was that a building intended for use solely for a relevant residential purpose could not also constitute a "dwelling".

HMRC's new policy means that in circumstances where HEIs are unable to certify that a new building is intended to be used solely for a relevant residential purpose, the building may nevertheless qualify for zero-rating as new "dwellings". In particular, HEIs may not be able to provide the required certification as to intended use if the student accommodation is to be used on a commercial basis during vacations or if the accommodation is not to be used by "students" (broadly, persons studying at a university or a centrally funded higher education institution).

If such certification cannot be provided, zero-rating on new "dwellings" may now be available in relation to student accommodation, provided that:

• each dwelling consists of self-contained living accommodation, which HMRC now accept, for example, may include "cluster flats" (single flats with their own front door and en suite bathrooms, but with a common kitchen);
• there is no provision for direct internal access from one dwelling to any other dwelling or part of a dwelling;
• the separate use or disposal of the dwelling is not prohibited by the terms of any covenant, planning consent or similar provision; and
• statutory planning consent has been granted and complied with in respect of that dwelling.

Withdrawal of extra statutory concessions

The detrimental effect of HMRC's withdrawal of the current concession which enables HEIs to ignore vacation use when determining whether new student accommodation is intended to be used solely for a relevant residential purpose should be mitigated, provided the newly constructed student accommodation meets the conditions to be treated as "dwellings" as summarised above. It is likely, therefore, that new developments will be designed so as to meet these requirements.

In the meantime, grandfathering provisions have been introduced with the effect that relevant residential purposes certificates issued by HEIs which rely on HMRC's concession of ignoring commercial use of such accommodation by HEIs will still be valid where:

• for construction services, the supply is made before 1 April 2015 and relates to a meaningful start to the construction of a building by that date; and
• for the acquisition of new student accommodation, a meaningful deposit has been paid to the seller before 1 April 2015. The grant of call options prior to that date will not be accepted by HMRC.

Historic claims

Circumstances in which taxpayers may seek to make historic claims for the recovery of input tax in respect of student accommodation which was not previously zero-rated but which may, nevertheless, have constituted dwellings are likely to be uncommon in practice. However, please do not hesitate to speak to any of the Ashurst tax partners should you wish to discuss both the historic and future treatment of supplies of newly constructed student accommodation

Please click on the links below for the other articles in the February 2014 tax newsletter.

• "Salaried Member" rules for LLPs
• Tax avoidance: high-risk promoters and follower penalties
• Kumon: VAT abuse
• Marks & Spencer: cross-border group relief
• Southern Cross: compromise agreements with HMRC
• Tax compliance through use of the procurement process