HMRC VAT policy catches up with Town and Country Planning Orders

04 May 2016

David Wilson

It may have taken some time but, HMRC has finally clarified its policy concerning the VAT zero-rated sale (or long lease) following conversions of certain non-residential buildings into dwellings.

Changes to England’s planning laws in May 2013 created Permitted Development Rights (PDRs), thereby removing the need to obtain prior statutory planning consent from the local planning authority for the conversion of commercial buildings into dwellings. PDRs therefore streamlined the planning process by removing the need for full planning applications.

However, the VAT legislation which allows VAT zero-rated sales and long leases following residential conversions does require full planning applications as the builder, or developer, must demonstrate that statutory planning consent has been granted by the local planning authority, and that the conversion undertaken has been carried out in accordance with that statutory planning consent.

Thankfully, HMRC has now stated that, where it can be established that a conversion is covered by a PDR, and evidence of such can be produced, the sale or long lease of the converted dwelling will qualify for VAT at the zero-rate, or VAT reduced-rate where applicable to certain other works.

We can only speculate as to why HMRC has taken so long to clarify this change in policy. Perhaps, because planning laws are devolved to Scotland, Wales and Northern Ireland, it has proven difficult to address an ‘England only’ application of VAT law – PDRs are not available in Scotland or Northern Ireland, with only limited application in Wales.

Whatever the reason, we welcome this change in HMRC policy and hopefully, conversions carried out under permitted development rights is only the start of some pragmatic changes relating to VAT and the construction of, and conversions to, residential property.

Perhaps, in the not too distant future, we might also see some revised policy relating to other contentious VAT issues in the construction industry? For example, there are still some specific areas of dispute in the application and liability to VAT in: the construction/renovation of buildings incorporating part of an existing structure; the construction of buildings ‘in the grounds’ of other buildings; live/work units; the construction of annexes; and the construction of buildings for residential and charitable use. We live in hope.

If you would like any more information on this issue please get in touch with David Wilson or your usual RSM contact.