Is it 'designed as a dwelling?' – VAT Pitfall

'Qualifying building services’ and ‘related building materials’ are zero rated in respect of most of the construction costs of building a new house, or some other types of residential property. The same principles apply to conversions of non-residential property, although the reduced rate of 5% VAT is applicable.

Or is it?

To qualify for zero or reduced rating the ‘qualifying services’ must be used in the construction or conversion of a ‘building designed as one or more dwellings’.

VAT legislation says that a building is designed as a dwelling, or a number of dwellings, if the following conditions are met:

  • The dwelling consists of self-contained living accommodation
  • There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling
  • The separate use or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provisions; and
  • 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.

The first two points are fairly self explanatory and it is the third and fourth points, which are often overlooked, which can then mean that the whole project is liable to VAT at the standard rate of 20%.

To avoid falling into this trap:

  • The planning permission and necessary consents must be in place before the work is started
  • The terms of the planning consent must be considered in detail as they are crucial in defining whether the building or conversion will be a ‘dwelling’. Many planning authorities, particularly those in National Park areas, have restrictions in the planning in respect of the use of the building or the position on a future disposal.

 If you require assistance with these complex VAT issues please contact us.

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