HMRC have released Revenue and Customs Brief 13 (2016), 'VAT, the liability treatment of a dwelling formed from more than one building', this sets out a change in its VAT treatment for contruction and conversion of dwellings.
HMRC had considered that whilst a building could contain more than one dwelling, a dwelling could not be formed from more than one building. Recent conflicting First Tier Tribunal cases (see FTT overrules HMRC on property conversions) have caused a policy change: they now accept that a number of buildings may be combined to form a single dwelling as long as they are designed to function together for that purpose.
As a result:
- The construction of dwellings formed from more than one building can be eligible for zero rating.
- The reduced 5% rate of VAT can apply to conversion of premises consisting of more than one building into a dwelling (e.g. where they are converted to a different residential use).
In order to be eligible for zero rating buildings must:
- Meet the usual conditions to be a ‘building designed as a dwelling’.
- Be constructed or converted under a single project and single consent.
If a new dwelling made up of more than one building is constructed in stages, HMRC will view the subsequent stages as annexes which will not be zero rated unless:
- The buildings are on the same site;
- The stages are completed with no unreasonable delay between them; and
- None of the buildings are occupied until all the stages are complete.
Anyone who has previously constructed or converted eligible buildings into dwellings consisting of more than one building but didn’t treat this as zero rated can submit claims for overpaid VAT subject to the normal time limits. HMRC may refuse claims where the claimant would be ‘unjustly enriched’ as a consequence.