VAT status of dwellings created by conversion of non-residential buildings
A dwelling that has been created by the conversion of a non-residential, for instance by conversion of offices or a barn, is similar in VAT terms to a new-build dwelling. As long as certain conditions have been met the first sale of such a dwelling, or the first grant of a lease exceeding 21 years, by the “person converting” is zero rated. This allows the developer to recover the VAT on the costs of the conversion. Similarly a person converting a non-residential building into a dwelling for him- or herself may make a claim for repayment of the VAT incurred on the conversion costs under the Do It Youself Housebuilders Scheme.
Why is Statutory Planning Consent important?
One of conditions that needs to be met in order to obtain the favourable VAT treatment noted above, or to make a valid claim under the Do It Yourself scheme, is that the conversion must have been given statutory planning consent and that the work has been carried out in accordance with that consent. Note that the required consent must be obtained before the work is carried out.
This condition must also be met if the relevant conversion works are to be reduced rated.
Permitted Development Rights (PDRs)
These are relaxations of the requirement to obtain statutory planning consent in certain circumstances. Permitted Development Rights were first introduced a few years ago but more recently have been extended to the conversion of many types of commercial premises, including agricultural buildings, into dwellings. Some works covered by PDRs still require the prior approval of the Planning Authority.
Is a conversion still a qualifying conversion without Statutory Planning Consent?
A conversion carried out under PDRs does not need Statutory Planning Consent and so developers and DIY claimants have been concerned that their costs would be increased by irrecoverable VAT as they could not show HMRC a Statutory Planning Consent.
HMRC have now issued guidance in Revenue and Customs Brief 9 (2016): VAT treatment of conversions of non-residential buildings into dwellings under permitted development rights. In cases where a Statutory Planning Consent is not required under Permitted Development Rights HMRC will accept that a Statutory Planning Consent has been granted if there is either:
a) Written notification from the Planning Authority of grant of prior approval (where this is required), or
b) Written notification from the Planning Authority that prior approval is not required, or
c) Evidence of deemed consent in cases where the developer has written to the Planning Authority for approval or confirmation and has not received a reply within 56 days. Evidence must be shown that the development falls within Permitted Development Rights.
In all cases developments must comply with building controls. If it is thought that building control is not applicable this must be confirmed by the Planning Authority.