The development of student accommodation and VAT is something of a minefield. Without careful planning, the VAT costs incurred by a developer may be irrecoverable, which could affect the overall profitability or even viability of the development scheme.
In this article we consider some of the VAT issues facing developers of student accommodation and what, if any, planning can be done to mitigate VAT costs.
Purchasing property
If VAT is potentially payable on the price, the developer should consider whether this is recoverable or avoidable. Whether the VAT can be recovered will depend on a number of things, including what the property was previously (if the development is a conversion) and what the developer intends to do with it once developed (ie, let or sell).
The VAT may be avoidable if the developer can disapply the seller’s option to tax. A disapplication can occur if the developer is acquiring property with buildings on that it intends to convert to dwellings or to be used solely for a relevant residential purpose (RRP) (see first box).
In order to disapply the seller’s option to tax, the developer must issue a VAT certificate to the seller (see second box). At first glance, a disapplication may look attractive but this needs to be considered carefully, particularly if it could give rise to a clawback of VAT by HMRC from the seller, the cost of which the seller may simply look to pass onto the developer. If the developer can recover VAT charged by the seller, then besides a VAT cashflow cost and an additional stamp duty land tax liability (as SDLT is payable on VAT), it may be preferable for the developer not to disapply the seller’s option to tax. The developer will need to liaise with the seller to come to a conclusion on this point.
Developing the property
The construction of entirely new student accommodation which is considered, for VAT purposes, to be dwellings or is to be used solely for a RRP should not, in the main, be subject to VAT.
For the new building to be classified as “dwellings”, a number of conditions need to be satisfied. These conditions look relatively straight forward (see third box) but catch many taxpayers out.
For the building to be used solely for an RRP, it has to be used at least 95% for RRP use and, as noted in the first box, this can cause problems in respect of non-term time use.
Ensuring no VAT is payable on the construction can be complicated where there is some linkage with an existing building or where parts of a previous building are incorporated into the new building. This needs to be considered carefully.
If the new accommodation is to be used solely for an RRP, the developer should issue a certificate to its contractor before any works are undertaken to ensure that the contractor does not charge VAT on the construction works where it does not have to. There are no certification requirements on the construction of dwellings.
The services of architects and surveyors engaged with the development will typically be subject to VAT, albeit this can be mitigated if such services are provided under a design and build contract.
Works converting a building to dwellings or solely for RRP use may, depending on what the building included prior to conversion (ie, whether it included dwellings or was used for an RRP), benefit from the reduced VAT rate of 5%.
It is imperative that developers understand whether they are constructing dwellings or a building solely for RRP use. This distinction will influence the VAT position in respect of the construction of any ancillary facilities in buildings separate to the accommodation and possibly the structure of any later disposal of the property. HMRC has confirmed that it is possible for the accommodation to be both dwellings and used solely for an RRP and where this is so, the taxpayer can rely on either to achieve the most favourable VAT position.
Use of the property
If the developer intends to let the property to students on short-term letting arrangements, this could, without planning, prevent it from recovering any VAT incurred in connection with the purchase and development of the accommodation. In these circumstances the developer could consider granting a lease (in excess of 21 years) to an operating company within its corporate group (but not its VAT group) and have that operating company make the lettings to students.
Due to the VAT status of the grant of this long lease, this should enable the developer to recover most of the VAT incurred by it in connection with the purchase and development of the property. The operating company would be unable to recover VAT incurred on the management of the property, but this is a VAT cost of all residential letting businesses which the developer would otherwise have incurred (together with the other irrecoverable VAT costs on the purchase and development of the property).
VAT cannot be recovered by the developer on items covered by the VAT blocking order, which would include white goods and carpets.
Disposing of the property
The disposal of newly constructed student accommodation by the developer or operating company, whether by way of a freehold sale or the grant of a long lease, will not be subject to VAT if it is considered to be dwellings.
If the accommodation does not consist of dwellings and is instead to be used solely for an RRP, the “change of use” rules will need to be considered. These rules apply if within 10 years of completion of the new accommodation, the use of the building changes or the building is disposed of, whether or not this involves a change of use.
Where these rules apply, some of the VAT saved by the developer on the construction of the property can become payable by the developer to HMRC. The amount payable will depend on when in the 10-year period the building is disposed of. It should be possible to avoid the application of these rules by granting a long lease instead of making a freehold disposal. If the new building is used solely for an RRP but is also considered to be dwellings, the developer can treat the building as dwellings to avoid such charge.
Forward thinking
It should be possible with careful planning to mitigate a lot of the VAT costs on a student accommodation project. This will, however, require some forward thinking and the best advice is to always consider the VAT position at the beginning of any such project.
Alex Barnes is a partner at MemeryCrystal LLP
What is a ‘dwelling’?
A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied:
■ 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 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.
What is an RRP?
Property will be used for an RRP if it includes student accommodation. HMRC has issued guidance on the meaning of “student” in its manual (at VCONST15360) and considers a student to be “a person undertaking a course of educational study or instruction”.
The property has to be used “solely” for a RRP. HMRC considers that “solely” means at least 95% for RRP use. This can cause problems where the accommodation is let to non-students during holiday time.
Issuing a VAT certificate to the seller
An option to tax will be disapplied only if the developer issues a certificate to the seller to evidence that they have the relevant conversion intention.
The certificate must be given on Form VAT 1614D, which can be found at www.gov.uk/gov.uk/government/collections/vat-forms. The certificate is effective only if it is issued before any supply is made by the seller, which on a freehold disposal will normally mean completion of the sale.
The certificate can be issued by the developer at any point prior to the sale price being legally fixed.
Once the price has been legally fixed, the certificate can be issued only with the agreement of the seller.
