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HMRC Changes VAT Rules On The Expansion Of A Dwelling

by Jason Gorringe,, London

29 August 2016

The UK tax authority has released Revenue and Customs Brief 13 of 2016, updating its rules on the value-added tax treatment of a dwelling formed of more than one building, following a 2012 ruling from the UK's First-Tier Tribunal in Mark Catchpole v. HMRC (TC 01995), released April 13, 2012.

Prior to that ruling, 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.

HMRC's new brief explains HMRC's change in policy relating 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. HM Revenue and Customs now accepts that single dwellings can be formed from more than one building.

In its ruling in Mark Catchpole, the Tribunal pointed out that, based on ECJ jurisprudence, a court may decide how to interpret legislation, providing such is tenable, to ensure fair treatment of two substantially similar situations. "A number of ECJ cases have encouraged this approach, and this approach confirms us in the view that we are right to adopt the interpretation that where two buildings comprise one dwelling and the dwelling satisfies all the tests of the crucial Note (2) [set out below], it would be unfair, and discriminatory for this taxpayer to fail to recover VAT when the next-door neighbour building a two-storey house with similar accommodation would recover the VAT."

Note 2 to Group 5 Schedule 8, VAT Act 1994 provides:

"(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied:

  • (a) the dwelling consists of self-contained living accommodation;
  • (b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
  • (c) the separate use, or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent, or similar provision; and
  • (d) 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."

HMRC said it accepts the Tribunal's decision, considering that it can apply in principle to some conversions. "HMRC now accepts that the law doesn't require a dwelling to be formed from a single 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," the agency said.

HMRC said, 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 (the meaning of "complete" is explained in Section 3.3.2 of VAT Notice 708: buildings and construction

TAGS: court | tax | law | United Kingdom | tax authority | legislation | construction

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