HMRC revises VAT treatment of dwellings

HMRC has outlined a change in policy to the treatment of dwellings that have been formed from either the construction of new buildings, or from the conversion of non-residential buildings into a dwelling.

In a policy paper, the tax authority said it now accepts that single dwellings can be formed from more than one building. A number of buildings may be combined to form a single dwelling as long as they are designed to function together for that purpose.

In order to be eligible for the zero-rate, the buildings must meet all the following:

• the development must meet the conditions of a‘building designed as a dwelling’and to this end ‘building’ can mean more than one building
• all buildings must be constructed or converted under a single project and under a single consent, if a new dwelling that is made up of more than one building is constructed in stages, we will view subsequent stages as annexes to the original building, which will not benefit from the zero-rate unless the buildings are on the same site and:
• the stages are completed with no unreasonable delay between them
• none of the buildings are occupied until all the stages are complete (to understand what is meant by ‘complete’ please read Section 3.3.2 of VAT Notice 708: buildings and construction

Previously, HMRC had considered that while a building could contain more than one dwelling, a dwelling could not be formed from more than one building. This was because the law, Group 5 of Schedule 8 of the VAT Act 1994, consistently referred to ‘a building designed as a dwelling’, which HMRC considered precluded more than one building from constituting a dwelling.

However, it was decided in the First Tier Tribunal cases of Mark Catchpole and Mr T Fox that for the purpose of Group 5, it was appropriate to interpret the law as allowing the construction of dwellings formed from more than one building, to be eligible for zero-rating. HMRC, having accepted this decision, considers that it can, in principle apply to some conversions.

Those who have constructed or converted eligible buildings into new dwellings, consisting of more than one building that hasn’t previously been treated as zero-rated (for example, works of construction and eligible conversion services) may submit claims for overpaid VAT with retrospective effect up to 4 years from the date of the publication of this brief.