A client rents out a number of residential properties and as the rental income is exempt he is not registered for VAT. He has recently acquired some land and is going to build a new residential care home on it. The client is not sure if he is going to run the care home himself or sell it to a third party. Their understanding is that he can receive building services from a building contractor at the zero rate of VAT in either scenario but please can we clarify the position?
A supply in the course of construction of a building intended for use solely for a relevant residential purpose and of any services related to the construction (other than services of an architect, surveyor or any person acting as a consultant or in supervisory capacity) can be zero rated (VATA 1994, Schedule 8, Grp 5, item 2(a)).
Included within the definition of relevant residential purpose is a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder. (VATA 1994, Schedule 8, Grp 5, Note 4). Also included within the definition of relevant residential purpose are homes providing residential accommodation for children, hospices and residential accommodation for students or school pupils and the armed forces. A full list is provided in VAT Notice 708: Buildings and construction Section 14.
In order to qualify for zero-rating the supply must be made to the person that intends to use the building for a relevant residential purpose. (VATA 1994, Schedule 8, Grp 5, Note 12 (a)) and that person is required to give a certificate to the building contractor certifying that they will use the property for relevant residential purposes. (VATA 1994, Schedule 8, Grp 5, item 12(b))
Therefore, if the client chooses to run the care home himself, he will be able to issue a certificate certifying that he will be using the building for a relevant residential purpose and obtain the building services at the zero rate. However, if the client decides to sell the care home, he cannot issue a certificate and so the building services he receives will be standard rated.
The VAT legislation surrounding relevant residential buildings such as nursing and care homes and also student accommodation is complex and advisors working in this area need to be especially cautious because there are numerous traps for the unwary. It is easy to underestimate the complexities of such transactions and getting it wrong can easily result in a substantial irrecoverable VAT cost.