1 April 2015 will see a major change in the VAT treatment of student accommodation, impacting on developers and institutions such as universities and colleges. HMRC’s existing concessions, facilitating zero-rating, are being withdrawn but certain approaches can mitigate the VAT impact.
Student Accommodation Concession
Firstly, the construction of new student accommodation can be zero-rated by a developer provided the usage of the property qualifies under the Relevant Residential Purpose (RRP) rules. This requires that the accommodation be genuinely and solely for students, with student usage being at least 95%.
This 95% usage has been difficult to meet due to the long student holidays and the desire of owning institutions to supplement their income with holiday rentals. To date, an HMRC concession has permitted holiday usage by Higher Education Institutions (HEIs) to be ignored in determining the 95%, but no longer.
Thus institutional acquirers of such properties may no longer be able to certify to developers that they will meet the 95% criteria, forcing the developers to charge VAT. Alternatively, any certified VAT-free purchases could face VAT claw backs in future years where usage does not comply.
Dining Rooms & Kitchens Concession
Secondly, a similar issue arises in relation to dining rooms and kitchens (which are often in separate buildings). HMRC’s concession has allowed construction of these to be zero-rated if used predominantly by the live-in students, if constructed at the same time as the student accommodation and if at least 50% of diners are the student residents. From 1 April HEIs will face the same certification challenges as above.
Abandoning holiday rentals and restricting rentals to ‘students’ are commercially disadvantageous. Alternatively, developers and HEIs can agree designs that target zero-rating under a separate VAT provision for dwellings. The term “dwelling” has been much litigated in VAT so careful attention is required.
Dining rooms and kitchens could still qualify for zero-rating where they are constructed at the same time as the student accommodation and are intended to be used solely (95%) for the resident students, guests and those working to look after the property. However, the interaction between this approach to zero-rating and pursuing the zero-rating for ‘dwellings’ will need to be considered.
Definition of ‘Students’
HMRC have also tightened their definition of qualifying students, which will affect the above, notably holiday lets. HEIs will need to review their holiday letting market to try to maximise “student” lets and minimise non-qualifying lets. This may not be so straightforward commercially.
The above changes will apply to new properties constructed after 1 April 2015. There are transitional measures that will permit the continuation of the current treatment beyond 1 April 2015 for existing properties, projects currently underway or those just starting.
The conditions applicable to these transitional rules need to be checked as assumptions could prove expensive, particularly for those just commencing.
Seeking specialist advice at the planning stage is essential; VAT treatments are difficult to reverse once the concrete starts to set.