Education institutions are rightly keen to minimise the VAT they incur on expenditure, as they make exempt supplies and the VAT therefore becomes a cost for them.
Construction projects in particular can generate large VAT costs. Practitioners would normally identify qualifying new buildings for which zero-rating could be requested from the contractor, minimising the VAT costs as far as possible.
At first glance this might seem an effective solution for new student accommodation. However, one of the tests to qualify for zero-rating is that the building should be used solely for relevant residential purposes. As student accommodation is often put to non-qualifying uses (e.g. rented out during vacation periods), such buildings would not normally qualify for zero-rating on construction. HMRC had therefore permitted a concession, allowing certain education institutions to ignore non-qualifying vacation use and claim the valuable zero-rating.
On 7 April 2014, HMRC issued Brief 14/14 announcing that the concession will be withdrawn from 1 April 2015. This is an important change which will affect the contractors and the universities and higher education institutions which construct new student accommodation and associated buildings such as new dining halls and kitchens.
Those affected and their advisers should already be anticipating significant additional VAT costs. In particular, they should begin planning to ensure they can take advantage of the transition rules by making a “meaningful start to the construction of the first building”.