The first sale or grant of a long lease of any dwelling has always been zero rated provided it was "designed as a dwelling", but where the dwelling is sold with the option for the occupant to purchase health care at some time in the future, often known as "extra care accommodation", there were some concerns as to whether the same zero rated treatment would apply. In addition, a dwelling with the option to purchase care, has often been classified by planning authorities (under the Town and Country Planning (Use Classes) Order 1987) differently from the class ordinarily applied to dwellings. This added to the confusion.
The different classification of a dwelling and the option to purchase health care with it, lead some developers to question whether zero rating would apply. If the supplies were exempt or partly exempt, the developer would be restricted in the ability to reclaim input tax adding considerably to the cost.
HMRC have now confirmed, in their Revenue & Customs Brief 47/11 issued on 30 December 2011, that zero rating will apply to "extra care accommodation" and that the classification for planning purposes is not of itself determinative (Use Class C2 is used for dwellings with the option to purchase care, rather than the normal Use Class C3 for dwellings). Zero rating will therefore continue to apply to the construction, first sale or grant of a long lease in excess of 21 years of buildings used as extra care accommodation designed as dwellings (i.e. self-contained flats, houses, bungalows or maisonettes that are sold or let with the option for the occupant to purchase varying degrees of care to suit his or her needs).
It is important to note that to achieve zero rating and recovery of all input tax incurred, all dwellings must be "designed as a dwelling". The dwelling must consist of self-contained living accommodation and all the standard zero rating "designed as a dwelling" conditions must be met i.e:
- there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
- the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
- the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; and
- statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.