The new guidance gives the term 'student' a "more specific and restrictive meaning" according to Jon Robinson, a tax expert at Pinsent Masons, the law firm behind Out-Law.com. It will mean that new residential accommodation for students or school pupils will only qualify for 'zero-rating' for VAT purposes if the accommodation is "solely" occupied by students, and if those students are in the process of obtaining a "generally recognised academic or professional qualification".
New residential accommodation built for a relevant purpose, including residential accommodation for "students or school pupils", is generally zero rated for VAT purposes. This means that landlords do not have to account for VAT on tenancies in applicable accommodation; but the significant VAT costs incurred on the construction of the accommodation can still be recovered, as would not be the case if the accommodation was exempt from VAT entirely.
Previously, HMRC's published interpretation of the term 'student' was wide enough to cover anybody engaged in a course of study or instruction, and was not limited to those attending college, university or another further or higher education institution. However the new guidance from HMRC restricts the term to cover an individual that has "left school and is in higher or further education or training at a college, academy or university with a view to obtaining a generally-recognised academic or professional qualification or maintaining an existing professional qualification for which accreditation is received".
Tax expert Jon Robinson said that in order to benefit from zero-rating, the accommodation must be used "solely" to house students or school pupils. He said that in practice, HMRC interpreted this as meaning 95% or more occupation by students.
"Any material 'non-student' use of the building could potentially create a huge irrecoverable VAT cost for the project," he said.
HMRC's guidance lists several scenarios where zero rating would apply, along with several scenarios where it would not. As well as applying to those studying college and university courses, zero rating would also apply where the student was working to maintain an existing professional qualification, including through continuing professional development (CPD) required by an employer or a professional body, according to the guidance. However, it would not apply to courses related to "hobbies or leisure interests" rather than "educational or vocational training", it said.
"People who attend classes, often badged as 'summer schools', which may offer a life-enhancing experience and promote greater cultural or spiritual awareness but the subject matter of which falls into the category of hobbies or leisure interests (for example pottery workshops, art or literature appreciation courses etc.) ... will not qualify as 'students'," the guidance said.
However, summer schools "in which international students and others have the opportunity to undertake a programme of study comparable with the work done by full-time students" would continue to qualify, according to the guidance.
Editor's note 07/02/14: This story was updated to remove references to the holiday period concession previously available to higher education institutions which provide student accomodation, which will be abolished from April 2015. For more information, please see our latest update.