VAT on property development

United KingdomScotland

The Upper Tribunal’s decision in HMRC v Summit Electrical Installations Limited [2018] UKUT 0176 (TCC) provides some useful commentary on the meaning of “designed as a dwelling or number of dwellings” for the purposes of zero-rating and the potential impact of planning restrictions relating to separate use and disposal. The decision provides helpful clarification of the rules for developers of build-to-rent properties and student accommodation.

Background

The case concerned the VAT liability of Summit Electrical Installations Limited (“Summit”) who carried out electrical installations as subcontractor in connection with the construction of student accommodation. The planning consent granted in respect of the accommodation was subject to a condition that “no person other than a full time student attending the University of Leicester or DeMontfort University…shall occupy these flats at any time” (the “Planning Condition”).

Summit contended its supplies to the main contractor were zero-rated as supplies in the course of construction of a building “designed as a dwelling or number of dwellings." The VAT legislation sets out a number of conditions that must be satisfied for a building to be categorised as designed as a dwelling or number of dwellings. The condition in issue (referred to as “Note 2(c)”) specifies that if the separate use or disposal of the dwelling is prohibited by the term of any covenant, statutory planning consent or similar provision, zero rating is not available. HMRC argued that the Planning Condition did prohibit the separate use of the accommodation and so zero-rating was not available to Summit. The First-tier Tribunal (“FTT”) rejected HMRC’s argument and found in favour of Summit.

HMRC appealed to the Upper Tribunal (“UT”).

Upper Tier judgment

The UT upheld the decision of the FTT on the basis that “separate use” in Note 2(c) should be read as use of the premises “separately from the use of other specific land.”

The UT considered case law on the subject of “separate use” such as HMRC v Lunn [2009] UKUT 244 (TCC), HMRC v Shields [2014] UKUT 0020 (TCC) and HMRC v Burton [2016] UKUT 0020 (TCC), all of which involved planning conditions linked to separate specified addresses. In all of these cases, it was decided that the planning conditions did not satisfy the requirements of Note 2(c) as they linked the use of the various properties in question to other land specified in the conditions.

The UT distinguished the facts of these cases from those of the current case on the basis that the Planning Condition was not linked with any degree of specificity to other particular university premises or buildings. The UT stated that “a link with specific land or premises [is] crucial.” Restricting the occupation of a building to a business or an activity alone was not enough to constitute a prohibition on separate use of a dwelling for the purposes of Note 2(c), unless the restriction linked the premises both factually and legally to the use of other specific premises.

Commentary

This case provides useful clarification of the scope of Note 2(c) and is particularly relevant to those engaged in the development of build-to-let properties and student accommodation.

If you wish to discuss any aspect of the case, please get in touch with your usual CMS contact or any member of our tax team noted below.