VAT payable on commercial property bought to convert to student halls

[DVEG85]

I am considering purchasing a commercial building. My intentions would be to purchase the property through our residential investment company (which isn’t VAT registered) and immediately convert it to student halls (consisting of 5 separate flats).
 
One of my major concerns is that there may be a significant VAT bill on the sale of the building. From the research I have done, and from answers I have obtained from other questions on your forum (thank you!), I understand there is a tax scheme that may allow us to do ‘dissaply’ the VAT via the VAT 1614D form.

I also understand there is some uncertainty as to if student halls are deemed to be residential dwelling or commercial (HMRC certainly used to deem it commercial). Please advise me if this conversion would be deemed by hmrc to be a residential dwelling? And if I would be able to get off with the VAT?

Thank you in advance!

[Marie Stein]

Status of student accommodation

I’ll answer your last question first as it’s actually fundamental to your query.

Under current VAT legislation, student accommodation isn’t treated as a dwelling, but as a type of relevant residential property (“RRP”). RRP is a separate category to dwellings within the VAT legislation but is entitled to many of the VAT reliefs as dwellings. There are some differences so for the purposes of this post, I’ve only referred to the RRP category of properties.

The current treatment has been in place since 1981, when VAT was introduced on most commercial property costs and the option to tax was introduced in the UK. Prior to 1981, the only distinction was between dwellings and non-dwellings so you’d be right in thinking that student accommodation was probably treated as commercial property prior to that date.

The 1981 changes brought the UK VAT and property rules into line with the EC Directive, which in principle means that commercial property is liable to VAT, whilst dwellings and properties which fulfill certain social functions are entitled to certain reliefs from VAT. This latter category is defined within the UK legislation as 2 specific types of property; first RRPs and second, properties that are used for “relevant charitable purposes”.

See section 14.6.1(d) of HMRC VAT Notice 708, Buildings and Construction http://tinyurl.com/66v7yb2 which lists the types of property covered by the RRP category, which includes student accommodation.

In your case, it’s important to establish that the property falls within the RRP category as it’s this treatment that would allow you, the purchaser, to tell the vendor that the option to tax can be disapplied.

Disapplying the option to tax

You are correct that the VAT 1614D form can be used to request the vendor to “disapply” the option to tax if you purchase a building that is to be used or converted for use as relevant residential purposes. The information is contained in VAT Notice 742a: Opting to tax land and buildings which is here http://tinyurl.com/3g32uz.

Information about disapplying the option is at section 3 of the notice, section 3.3 refers to RRPs and specifically includes “student halls of residence”.

Section 3.4 of the notice explains about the certificates and specifically that the certificate must be given to teh vendor “before the price for the grant to the recipient by the seller is legally fixed, for example by exchange of contracts, letters or missives, or the signing of heads of agreement.” So make sure that you get any such certificate sorted out well in advance of reaching any agreement on price.

Effect of disapplying the option for the vendor

It’s worth remembering that one effect of issuing a certificate is that the vendor may end up having to repay to HMRC some or all of the VAT that he has paid relating to the property – perhaps on the original purchase or build cost. In practice, this often means that vendors look to pass on by increasing the overall cost of the property so that instead of perhaps charging the property cost of £1m plus VAT of £200,000, the cost of £1m may increase to cover his own VAT cost. This would almost certainly be less than the 20% VAT he’d have to charge if the option weren’t disapplied, but I’ve seen situations where vendors might end up increasing the cost by anything from say 1 – 10% to cover their own VAT costs.

I hope that makes sense – it isn’t that you’d be paying VAT of 1 – 10%, its simply to illustrate that the vendor may try to increase the property cost by sufficient to cover his own VAT costs.

VAT liability of construction work

The other issue that you might want to read up on is the VAT liability of the conversion work as it would obviously affect the cost of the whole project. That’s contained in VAT Notice 708: Buildings and Construction. Section 7 of the notice explains when conversion work can be liable to VAT at the reduced rate of 5%, which is a big saving especially now that the standard rate is 20%. I believe you need to issue a certificate to the builder to get the reduced rate, the information is in the notice. But again this is something you need to sort out in advance.

As with any post on the forum, this should not be regarded as definitive advice relating to any specific transaction, but as a summary of the VAT issues that normally apply in such cases. I’d be happy to give tailored advice through my formal consultancy service.

Marie
13 January 2011

[jck1628]

Dear Marie

My question is related to TOGC. In my case, the vendor has opted to tax the property which already has student accommodation but there are a couple of shops on the group floor. The student accommodation is let but the shops are vacant at the moment – should this transaction be a TOGC?

Many thanks!
John

[Author]

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