The potential impact of COVID-19 on buildings and building works
Broadly speaking, the VAT treatment of building works is determined first by intended use and then the actual use of the building in the first ten years. Recent events have meant that buildings have, in some instances, been put to a different use than was first intended - this can have VAT consequences leading to extra VAT being payable to HMRC. We have identified some case studies below covering different types of organisation to illustrate the potential pitfalls and possible solutions.
1. VAT recovered on new office building
An organisation acquired (or built) a new head office. The intention was for the office to house all support functions of the organisation and on this basis VAT is recovered with its usual activities. However, the impact of COVID-19 is that more staff will work from home in the future; the organisation no longer needs the entire office, so it lets half of the building to a tenant. The letting of the building is VAT exempt, which leads to VAT recovery being diluted by half under the provisions of the Capital Goods Scheme.
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Possible solution: It is possible to apply VAT to the letting of commercial buildings by ‘opting to tax’. Therefore, in the above scenario, the organisation could have applied VAT to the rent so that the VAT recovery was not diluted. If the organisation made other exempt supplies this could even lead to extra VAT being recoverable from HMRC. |
2. Impact of changed use of student accommodation
An independent school built an accommodation block for its students in 2015 and the works were zero-rated. In 2020 its students were not using the accommodation, so the school used the accommodation to house key workers in the fight against COVID-19, with the NHS making payments to the school for the use of the building for six months. Potentially, this change of use could crystallise a VAT charge to HMRC because the building was not being used to house students.
| Possible solution: It is not possible to opt to tax student accommodation. Therefore, it would be necessary to approach HMRC to see if they would agree not to apply the charge in light of the circumstances. The Charity Tax Group (CTG) has been speaking to HMRC who has stated its willingness to help, but that each case would need to be looked at on its own merits. CTG has invited charities for input on this matter – access their release here. |
3. Impact of changed use of charitable buildings
A charity constructed a nursery building in 2011 and used this for nine years to provide individuals with a free nursery services – the building works were again zero-rated. The health crisis in 2020 led to the nursery closing and the building being let to a local NHS trust to store PPE equipment. The charity would potentially have to pay VAT to HMRC on one tenth of the cost of the building works as the letting activity was not deemed as being ‘non-business’, as required for zero-rating to apply.
| Possible solution: The charity could seek to apply VAT to the letting activity by opting to tax, to ensure that the VAT due to HMRC on the building works could be recovered as input tax. If it was not commercially viable to apply VAT to the let (perhaps if the NHS trust could not recover the VAT), it would be necessary to approach HMRC as covered in Case Study 2 above and the CTG briefing. |
Should you have any queries related to this release please contact Robert Warne or Kieran Smith.
