When should a sub-contractor charge VAT and when can they zero-rate?

In a case released on 14 July 2017, Summit Electrical Installations Limited v Revenue and Customs Commissioners [2017] UKFTT 564 (TC), the First-tier Tribunal found that the same supplies could be zero rated either as supplies for the construction of  dwellings or as supplies for the construction of relevant residential accommodation (eg student accommodation).

The appellant had made supplies as an electrical sub-contractor in connection with the construction of student accommodation. The issue was whether the supplies were zero-rated as supplies in the course of construction of buildings designed as a  of dwellings or as supplies for the construction of student accommodation.

The student blocks were designed as self-contained living accommodation including kitchenettes and en suite bathrooms. While the planning consent restricted use to students, there was no clause preventing each unit from being separately used or sold.  The main contractor refused to pay VAT on the sub-contractor’s services, on the basis that  what was supplied was the construction of dwellings and should therefore be VAT zero-rated.  The main contractor had received a certificate from the developer claiming relief from VAT on the basis that the new building would be used for a relevant residential purpose (RRP), namely a communal building for students.  Ordinarily sub-contractors working on RRP buildings are not entitled to zero-rate their services – VAT has to be charged at the standard rate which the main contractor must then reclaim on its VAT return.  HMRC considered that the issue of the certificate meant that sub-contractors could not zero rate their supplies to the main contractor.

The Tribunal agreed with the appellant that the student accommodation could be treated as ‘dwellings’ for VAT purposes. The Tribunal then considered HMRC’s published policy which is that subcontractors must charge VAT if a certificate has been issued to the main contractor claiming zero-rating under the RRP relief, even if the construction would also meet the definition of dwellings.  The judge dismissed that policy as entirely wrong.

This ruling can save significant cash flow benefit for both sub-contractors and main contractors in that VAT would not require to be charged, paid and reclaimed.

For further information and help on VAT and construction work, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.