New Build for Holiday Letting

[kenca]

Hello,
I have looked at this site for the first time only a couple of hours ago and see some very useful advice. Some of it almost answers my question already; but not quite.

My wife and I own a small farm business. NOT VAT registered. We do a little trading but are not making much out of it. We want to build new holiday letting accommodation to diversify a bit and I have a quotation from a well established house building contractor. The builder in his quotation has told ne the house will be zero rated as it is a new dwelling; which is correct; but now I am unsure of the position as the builder is not yet aware of the intended use. This got me digging into VAT issues.

Am I correct in saying the VAT is recoverable if the build is linked to a farm business and is for furnished holiday lets. If this is the case; can the builder not zero rate the build in the first place as surely the net result will still be the same.

The house will be used in time as a permanent residence for my son and it would seem unfair that VAT should be paid on a build that will only be used for letting purposes for no more than a few years.

I am anxious to avoid VAT if possible as having to pay it would make the whole plan unaffordable.

Thank you in anticipation.

Kenca

[Marie Stein]

Hello Kenca

Thanks for your query and I apologise for the delay in replying but I hope this information is still helpful.
As I’ve explained below, I think that your confusion is probably because you are cross-referring two different rules.

I assume that you’ve already seen the HMRC VAT Notice 708: Buildings and Construction http://tinyurl.com/3osr2gf which explains the main rules about the VAT liability of construction work. The main rules about construction of new dwellings are set out at section 3 of the notice. Section 14.2 of the notice explains in detail the meaning of the term “dwelling” and these are relatively straightforward:

• 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 of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
• the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; 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.

See subparagraph 3.1.1 which refers to the definition of “dwelling” at section 14.2 of the notice. The fact that it may be used for holiday accommodation doesn’t affect the VAT liability of the construction work, as long as the above criteria are met at the time the construction occurs.

The phrase “designed to remain as or become a dwelling” appears at section 14.3 of the notice. However, the use of the term “dwelling” in this case is in connection with the VAT liability of approved alterations to certain listed buildings, which is explained in further detail at section 9 of the notice. See the cross reference to section 14.3 of the notice at subsection 9.2.1.

Therefore, in order to qualify for zero – rating as a new dwelling, the new property must satisfy the criteria set out at section 14.2 of the notice and not section 14.3 of the notice and the reference to “being designed to remain or become a dwelling” is not relevant in the case of construction of new dwellings.

Please bear in mind that while I can clarify the technical point you have raised here on the forum, I can never confirm the VAT liability of any particular transaction other than through my formal consultancy service. You shouldn’t treat the information given here in the same way as formal advice, especially if the issue would make such a difference to the cost viability of the project.

However I hope that this information has helped to clarify any confusion which you may have had when looking at the VAT Notice 708 and how the different definitions of the term “dwelling” apply different circumstances.

I also assume that your builder is aware of the correct rules and is prepared to zero-rate the construction work on the basis that the new property will fall within the criteria set out at section 14.2 of the notice. You might want to ask the builder to confirm in the contract that the work is zero rated, if necessary by reference to the guidance given in the notice or by reference to the relevant provisions in the VAT legislation.

Marie
1 September, 2011

[kenca]

Marie,

This seems to be good news and if things go to plan meantime, I would like to pursue this with yourself on a more formal basis.

The only aspect which I would like to clarify is the 3rd bullet point starting “the separate use of……

The planning consent states that the property when built must be used for holiday accommodation. You state that the fact it may be used for holoiday accommodation doesn’t affect VAT liability.

I assume the conditions referred to in the 3rd bullet point are not relevant to my case and that I comply with the terms of the 3rd bullet point.

[Marie Stein]

Hi Kenca

The way I understand the 3rd & 4th bullet points of 14.2.1 are that the new build property can be used and sold independently of any other property. For example some “granny flat” annexes don’t satisfy these criteria as they can only be occupied and sold in conjunction with the primary dwelling.

So as long as the newbuild property can be both used and sold independently of any other property and the other criteria at section 14.2.1 are satisfied, then the zero-rating criteria should be satisfied. Even if the property is to be used for holiday accommodation at some point, then the same criteria should apply.

I wish I could give 100% certainty on this issue as I appreciate that the VAT liability is a major cost factor in your situation. The frustrating point is that although taxes are one of the 2 inevitablities in life (and probably even less popular than death!), the application of the tax rules are not simple and it’s always possible that the rules could change in the future or that there is some factor about your situation that I can’t cover here on the forum. Even formal advice is never 100% certain as the VAT treatment of any transaction always depends on a number of factors, so you’d find that any advice will include a whole load of caveats, partly to cover ourselves as advisors and partly so that you appreciate that nothing can be guaranteed. For example, it’s always possible that HMRC could bring in some rule about use of “dwellings” as holiday accommodation that affects the liability of the construction.

But you’ve done your homework on this and if the builder is happy that his supply is zero-rated and the rules seem to support this position, as we’ve discussed here, it does seem that the construction will be eligible for zero-rating.

I’m happy to have a chat – at no obligation – about this so please give me a call if you want to discuss it. It might be helpful just so that I can explain the other factors that you may need to consider and then you can decide if you need formal advice. I suspect that you’ll decide that you don’t need formal advice but having a chat might help to put your mind at rest. The best time to contact me is between 2pm – 6pm weekdays (see my contact details for my number).

Marie

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