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Where Taxpayers and Advisers Meet

Live/work units - a disaster for my client ???

marc777
Posts:4
Joined:Wed Aug 06, 2008 3:55 pm

Postby marc777 » Thu Apr 24, 2008 6:30 am

A construction client is completing 7 New build Live/work houses with a sale price of £500,000 each. A recent VAT visit has resulted in an assessment for VAT on the 2 units already sold, with a direction that the remaining 5 houses be wholly standard rated. Not even any apportionment.

The reason given is that by merit of the planning covenant relating to the live/work unit i.e. that the commercial element cannot be sublet or sold separately, the remainder of the property fails to qualify as a "dwelling" and as such zero rating of this new build house is not possible. It all becomes standard rated.

This is a disaster for the builder concerned as the houses now become overpriced to the buyer, with £87,500 to be added to each, and with little or no scope of the buyer being able to recover VAT even if they were VAT registered. The alternative is to account for VAT from gross proceeds which is equally unsatisfactory.

Be clear, these are new build houses, with provision that a room reprsenting 20% of the area is used as an office/studio/workshop. The workspace is a large room within the fabric of the home.

Has anyone any experience in VAT and Live/work units?

Thank you

Marc

spidersong
Posts:352
Joined:Wed Aug 06, 2008 4:05 pm

Postby spidersong » Fri Apr 25, 2008 12:32 am

When I dealt with any live-work units apportionment was always accepted. Obviously the commercial element does have to have VAT applied to it but the remaining 80% should be zero rated as long as there's nothing stopping people occupying the dwelling part as their residence.

I'd sugest you ask the officer to read HMRC's own published guidance on live-work units, which makes no mention of being able to sell the two areas separately and says that apportionment is appropriate where separately identifiable areas form the live space and the work space.

HMRC's notice 708a dealing with 'Buildings and Construction' states at 15.4.1 "Units where the work area is shown as a discrete area of floor space, be it an office or workshop, must be apportioned to reflect the presence of the commercial element."

It at no point indicates that the whole of the supply will suddenly change to being standard rated, and deals quite heavilly with the need to apportion throughout all of section 15.4.

If he still argues I suggest you argue that HMRC have misdirected your client through incorrect advice in their leaflet and the tax should be waived.

I'm surprised that this hasn't been mentioned by anyone during the local reconsideration of the assesment. I assume that you have asked for the assessment to be reviewed by an independant officer?

If you haven't already reviewed the leaflet it's available for download from HMRC's website.

Let us know how it goes.

3pic
Posts:111
Joined:Wed Aug 06, 2008 3:44 pm

Postby 3pic » Fri Apr 25, 2008 12:45 am

I wonder if the local officer is mis-understanding a recent tribunal outcome relating to self-contained flats within the grounds of a car home which prompted a Business Brief which I've reproduced below :-

Revenue & Customs Brief 66/07
This brief sets out HMRC’s policy on the VAT treatment of the construction, and first major interest grant of, ‘independent living’ units within the curtilage or grounds of residential care homes. (A ‘first major interest grant’ is defined as the freehold sale or a lease in excess of 21 years, (20 years in Scotland.))

In order for services of the construction, or first major interest grant, of such units to qualify for zero-rating, they must qualify either as buildings ‘designed as dwellings’ or as buildings ‘intended for use solely for a relevant residential purpose’, within the meaning of the these terms as defined in the VAT Act 1994.

Although ‘independent living’ units generally have all of the physical characteristics of a ‘dwelling’, the units only qualify for zero-rating if they meet all the conditions laid down in Note 2 to Group 5 of Schedule 8 to the VAT Act 1994. Where such units have a stipulation in their planning permission that they cannot be used separately from the care homes, of which they form a part, the construction of such units is ineligible for the zero rate, as is the first grant of a major interest in such units.

We have also been asked to consider whether the new units form a building (or buildings) that are ‘intended for use solely for a relevant residential purpose’ thus qualifying the construction of the units for the zero rate.

In our view, the units do not qualify for the zero rate because, if personal care is provided to the occupants of the units, it is either not provided as a zero-rated home or institution would provide personal care or, if it is, it is provided as part of an existing home or institution.

So maybe the officer is just focusing on the planning consent aspect. As Spirdersong has posted, I've never come across a live/work unit where you cannot apportion the build costs between the living/working elements and certainly recommend that a review of the decision takes place.

Live/work
Posts:1
Joined:Sat Mar 20, 2021 4:33 pm

Re: Live/work units - a disaster for my client ???

Postby Live/work » Sat Mar 20, 2021 4:53 pm

Hi,

Wonder if the rules have changed in 2021.

Recently, we applied for vat refund on a live/work new build, that has the planning conditions,that the work could not be sold separately from the live. Sui Generis.
HMRC denied the zero rate and would apportion the live part either. Does this mean that unless I change the planning permission, then when I come to sell our house it will have to apply VAT.

Should we appeal the HMRC decision?

I’m just about to build another live/work, is there anything I can do to legally shield myself from VAT. I mean it’s a new build dwelling, HMRC need to get with the times.

Hope you can help!!

les35
Posts:635
Joined:Wed Aug 06, 2008 3:09 pm

Re: Live/work units - a disaster for my client ???

Postby les35 » Tue Mar 23, 2021 11:04 am

given the sums of money at stake, you should be asking HMRC to review and then consider an Appeal.

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Live/work units - a disaster for my client ???

Postby Trevor S » Tue Mar 23, 2021 10:54 pm

I agree with Les - particularly with the amounts involved. I'd also suggest that it's worth getting a professional advisor with experience in similar cases involved, to look into the specific details of your case. Sometimes facts which may seem quite minor can have a significant impact on VAT.

In the meantime, as a more general view - the relevant law is within group 5 of schedule 8 of the VAT Act 1994. Three key extracts (in my opinion) are:

The wording of the zero rating itself:
"1. The first grant by a person—
(a) constructing a building—
(i) designed as a dwelling ...
of a major interest in, or in any part of, the building"


The definition of "Dwelling" in the notes to that group:
"(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied—
(a) the dwelling consists of self-contained living accommodation;
(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and
(d) 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."


The potential to apportion, also contained within the notes:
"(10) Where—
(a) part of a building that is constructed is designed as a dwelling ... (and part is not);
...
then in the case of—
...
(iii) any other grant or other supply relating to, or to any part of, the building (or its site), an apportionment shall be made to determine the extent to which it is to be so treated."


Note 2(c) is where your problem potentially lies. HMRC appear to be saying that the planning restriction preventing the separate sale of the "live" and "work" elements prevents (any of) the building meeting the definition of a dwelling. This is the view expressed in their internal manual - the guidance used by HMRC officers: see the section starting here https://www.gov.uk/hmrc-internal-manuals/vat-construction/vconst14100 and particularly this page https://www.gov.uk/hmrc-internal-manuals/vat-construction/vconst14210.

It's always worth asking HMRC to formally reconsider prior to going to an appeal - although in this case I think it unlikely that they'll change their view, and you'll need to consider whether to appeal to Tribunal.

There have been many cases at Tribunal over the years considering that note 2(c). The HMRC guidance mainly lists decisions that have been in their favour, but even they accept that not all have. Specific details of each case may vary very slightly, creating what at first may appear to be conflicting decisions. For example, one relatively recent case not mentioned by HMRC (Barkas, in 2015) succeeded because the planning restriction only technically limited the operation of the "work" element to the occupant of the "living" element. It didn't actually prohibit separate disposal, however unlikely / impractical that may in reality be.

If you can get past note 2(c), note 10 would allow you to apportion between the two elements, reducing the VAT charge. But you'll need to win the case on note 2(c) first...

Good luck with whatever you decide!


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