HMRC has clarified its policy on zero-rating and reduced-rating for projects carried out under permitted development rights.
Business Brief 9/2016 clarifies the evidence required to support zero-rating (the sale of the converted property) and reduced-rated (conversion services) where a conversion from non-residential to residential use takes places without full statutory planning consent under the permitted development rules.
This brief is relevant to:
- Developers selling converted dwellings wishing to apply the zero rate;
- Construction industry contractors who may apply the reduced rate to the services they provided related to the conversion; and
- DIY housebuilders looking to reclaim the VAT incurred on a conversion carried out for their own purposes.
The first grant of a major interest (i.e. the freehold sale or granting of a lease over 21 years) in a dwelling following its conversion from non-residential use can be zero rated, provided certain conditions are met. One of those conditions is that statutory planning consent must have been granted and the conversion must have been carried out in accordance with that consent. However, as part of the process to streamline planning applications, some conversions do not require a full planning application and can be carried out under permitted development rights.
HMRC have clarified that they still require evidence that the conversion is lawful and would require one of the following:
- Written notification from the Local Planning Authority (LPA) advising of the grant of prior approval; or
- Written notification from the LPA advising that prior approval is not required; or
- Evidence of deemed consent (i.e. evidence that you have written to the LPA and your confirmation that you have not received a response from them within 56 days).
So the zero-rate and the reduced rate apply whether or not planning permission is granted?
No. Taxpayers will also need to provide evidence that the development is a permitted development. If a conversion is carried out and there was a requirement for planning permission then the developer and contractor cannot rely on the permitted development rules. This would mean that the most likely outcome would be VAT at 20% on the contractor costs which would likely be irrecoverable in the hands of the developer. VAT liability of any conversion that is not carried out in accordance with the applicable planning route would be exempt on sale. The works to the premises in the course of the conversion would be subject to VAT at 20%. It is therefore still important that developers and contractors ensure they are applying the rules correct to avoid a VAT cost.
The evidence that a developer or contractor should hold, includes all of the following (if available):
- Plans of the development;
- Evidence of the prior use of the property (e.g. evidenced by its classification for business rates purposes etc.); or
- Confirmation of which part of the planning legislation is relied upon for the development and a lawful development certificate where one is already held.
Whilst the use of permitted development rights is intended to streamline the planning process, HMRC’s clarification demonstrates that some interaction with the LPA will still be required in order to provide the necessary evidence of the planning status of the property in order to gain the benefit of the zero-rate and the reduced rate of VAT.