HMRC appeal against student accommodation VAT policy ruling rejected


HMRC’s appeal against a ruling that overturned its student accommodation VAT policy has been rejected in a case bringing benefits for companies involved in the construction of student housing, landlords and universities.

The decision not only provides reassurance to the student housing sector that subcontractors do not have to be paid VAT on new build student accommodation, but has additional implications beyond cash flow for all parties involved.

The Issues

The main contractor at Primus Place had received a certificate from the developer-landlord claiming relief from VAT because the new building would be used for a relevant residential purpose (RRP) i.e. a communal building for students. Ordinarily sub-contractors working on RRP buildings are not entitled to zero-rate their services; VAT must be charged at 20 per cent which the main contractor must then reclaim on a VAT return.

However, the units were designed as self-contained living accommodation including kitchenettes and en-suite bathrooms. While planning consent restricted use to students, there was no clause preventing each unit from being separately used or sold. Summit argued the zero-rate could be applied as they were working on ‘dwellings’. The relief for dwellings is broader than for RRP buildings and allows both main and subcontractors to zero-rate their services

The ruling

The tribunal agreed student accommodation could be treated as ‘dwellings’ for VAT purposes. It dismissed HMRC’s argument that a planning condition which restricted occupation to students of named universities prevented the accommodation from being dwellings for VAT purposes.

Implication for contractors

If HMRC had succeeded, main contractors would have been forced to pay VAT to subcontractors whenever planning consent referred to students of particular universities. While reclaimable, the VAT amounts involved are large and the cash flow impact is significant.

HMRC have been taking a strong approach to repayment claims, disallowing VAT charged by sub-contractors where student accommodation was being constructed. Time and money was being wasted by the lack of clarity in this area.

Wider implications

The tribunal’s confirmation that wider relief of zero-rating of dwellings still applies is important; it allows landlords to let student accommodation out to others during the holidays without incurring VAT which they would otherwise be unable to reclaim, in whole or in part, due to VAT exempt lettings to students.

The decision also reassures universities trying to ensure there is enough accommodation for students. Planning consent which only refers to ‘students’ is insufficient, particularly in cities where a large number of students are competing for limited accommodation.

Now zero-rated dwellings are being constructed even where planning consent restricts occupation to students from named universities, planners can be bolder in defining the class of residents, without creating unexpected tax problems.

Glyn Edwards, VAT Director at MHA MacIntyre Hudson, said: “The Tribunal’s decision reaffirms that the VAT policy for student accommodation needs clarification. HMRC must acknowledge this and provide better guidance for the construction sector to avoid similar situations arising.

“Confirmation that wider relief for zero-rating of dwellings still applies has been welcomed by landlords, planners and universities, reducing VAT costs that would otherwise have applied to those renting out student flats during holiday periods. This is vital to student accommodation projects as incurring a VAT charge that could not be reclaimed would make many developments unviable, reducing availability of accommodation for new students.”