Student accommodation: planning condition did not prevent VAT zero rating

"This case gives helpful guidance on what planning conditions do not breach the VAT zero rating conditions on university accommodation and new build dwellings projects. However, it is worrying that HMRC took the case in the first place and a reason for doing so must have been to try to widen the scope of the prohibition," said Christine Yuill, a property tax expert at Pinsent Masons, the law firm behind Out-law.com.

Summit Electrical Installations Ltd acted as electrical subcontractor on the development of a block of 140 studio flats in Leicester for university students and in 2015 it claimed a repayment of VAT because it said its services should be zero rated as supplies in the course of construction of buildings designed as a number of 'dwellings'.

In order to be a 'dwelling or number of dwellings' for VAT purposes a building has to satisfy a number of conditions set out in the VAT legislation (Note 2, Group 5, Schedule 8 VATA 1994). The dwelling has to consist of self-contained living accommodation and there must be no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling. These conditions were satisfied as each studio flat consisted of one room with a bathroom pod in the corner of the room, a kitchenette and an open plan sleeping and living area.

HMRC argued that a further condition relating to planning consent was not satisfied because there was a planning condition that the flats could only be occupied by full time students of Leicester or De Montfort universities. This condition, in Note 2(c) of the VAT legislation, required that "the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision".

The Upper Tribunal held, in line with other decisions, that a condition linking use to a business or activity was not in breach of Note 2(c). A prohibition on separate use referred to a use of the premises separate from the use of other specific land or premises, the Tribunal said.

It found that in this case, there was nothing in the planning condition that prevented the use of the building separately from the use of other specified land or buildings and so the planning condition did not prevent zero rating of Summit's supplies.