Zero Rate VAT & Construction Services

Are you Sure the Law is on Your Side?

It’s fairly widely known that the VAT Zero Rate applies to a variety of construction works. However, like many areas where VAT liability is an issue, it pays to be very clear on the legal basis for the relief. Not only will this ensure your project is VAT efficient, it will ensure that you have peace of mind. By fully complying you avoid the risk of HMRC imposing penalties where errors are made.

Which Construction Works Qualify for Zero Rate VAT?

You may be able to zero-rate the supply of construction services if you are involved in constructing a ‘qualifying building’. A qualifying building can be:

  1. A building ‘designed as a dwelling’;
  2. A building that will be used solely for a ‘relevant residential purpose’;
  3. A building that will be used solely for a ‘relevant charitable purpose’.

Construction services in categories 2 & 3 (relevant residential or charitable use) require the final customer to give a certificate supporting that use, allowing the main contractor to zero-rate the work to the customer. However, subcontractors cannot obtain the certificate and therefore, they must charge VAT at the standard rate to their main contractor.

So far, so good. However, what happens if the works relate to the construction of student accommodation (a relevant residential purpose) which is also ‘designed as a dwelling’?

That was the question raised in a recent Upper Tribunal hearing, in a case taken by Glyn Edwards from our member firm MHA MacIntyre Hudson called Summit Electrical Installations Limited. The Tribunal found that the accommodation being built in Leicester met the test of a dwelling (defined below), as well as the relevant residential purpose test (also defined below).

The Tribunal held the view that the fact that the accommodation qualified as a dwelling in its own right took precedence over the relevant residential purpose point. That allowed Summit – and all other subcontractors – to zero rate their works on the building, without the need for a certificate from the final customer.

Dwelling Definition

A building is ‘designed as a dwelling or a number of dwellings’ where the building contains a dwelling or more than one dwelling and in relation to each dwelling the following conditions are satisfied:

  1. The dwelling consists of self-contained living accommodation;
  2. There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
  3. The separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
  4. The separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
  5. Finally, statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Relevant Residential Purpose Definition

A building is designated as relevant residential purpose when it is being used as:

  1. A home or other institution providing residential accommodation for children;
  2. A home or other institution providing residential accommodation with personal care for persons in need of care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder;
  3. A hospice;
  4. Residential accommodation for students or pupils;
  5. Residential accommodation for members of any of the armed forces;
  6. A monastery, nunnery or similar establishment;
  7. Or an institution which is the sole or main residence of at least 90% of its residents.

This article is based on general principles; you should always seek specific professional advice based on the fact pattern of your project. If you would like to discuss this with us in more detail or if you would like to speak with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

This article featured in issue 9 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters Issue 9