Update and implications on a recent Tribunal Case considering the liability of construction services provided by sub-contractors working on a relevant residential development which included the construction of student flats.
Summit Electrical Installations Ltd  TC 06006 First Tier Tribunal case successfully challenged HMRC’s published guidance on the VAT treatment of construction services provided by sub-contractors working on new build student accommodation. The case, important to both main and subcontractors, concerned HMRC’s policy on the zero rate for construction of student accommodation. As a fee protection client, Summit were supported and represented by Croner Taxwise.
Summit Electrical Installations Limited were contracted by a main contractor to supply and install the electrics for a development of student accommodation. HMRC’s published policy in VAT Notice 708 advises that it is possible for the construction of a new building to qualify for zero-rated construction services as both a dwelling/dwellings AND a building to be used for a relevant residential purpose. For the zero rate to apply to the construction of a relevant residential building, the developer must provide a certificate to the main contractor certifying how the building will be used, and on that basis, the main contractor alone is able to use that certificate to zero rate his services. The policy further states that where a developer of a building which would qualify on both counts chooses to issue a certificate of relevant residential use to the main contractor, this will prevent those working on the building who do not hold certificates, i.e. the sub-contractors, from zero-rating the services they provide to the main contractor on the basis that the building is a dwelling, which has the potential to cause significant cash flow issues for the main contractor.
In the Tribunal, HMRC initially unsuccessfully challenged the zero rating by Summit on the basis that a planning condition restricting occupation of the units to students of the Universities of Leicester.
The Tribunal then considered whether there was any legal basis for HMRC’s policy within VATA 94 Schedule 8 Group 5, Notes 2, 4 and 12, which would apply to limit Item 1 (a) where a certificate has been issued, and found that there to be “absolutely no basis for HMRC’s policy”.
The correct liability to tax in this case, as in most cases, was not discretionary, any subcontractor can establish for itself whether the building it is constructing meets the conditions to be a dwelling as in Note 2. If the building meets those requirements, the sub-contractor’s services will be zero-rated.
While a First Tier Tribunal does not create precedent, the strength of the Judge’s opinion that there was no basis in law for HMRC’s stated policy in limiting the circumstances in which sub-contractors can zero-rate provides reasonable grounds for subcontractors to zero rate where the building under construction is a building is designed as a dwelling or number of dwellings. At this point, we should point out that HMRC have asked permission to appeal the decision made in the Summit case on the basis that the building they were working on was not designed as a number of dwellings on the basis of the perceived occupancy restriction.
In the event of a challenge from HMRC to sub-contractors choosing to zero rate the services of constructing a new dwelling where a certificate has been issued by the developer to the main contractor, the decision to zero rate where the building under construction is a dwelling is arguably not careless if consideration is required to be given to the potential issuing of penalties.
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