Residency restriction frustrated refund under HMRC’s DIY Builders’ VAT Scheme

If a building is not “designed as a dwelling”, as defined by Note 2(c) to Group 5 of Schedule 8 of the Value Added Tax Act 1994 for VAT purposes then it cannot qualify for a refund of input VAT on construction costs under HMRC’s DIY Builders’ Scheme.

If a condition in the property’s planning permission amounts to a prohibition of the separate use of the dwelling it will have the same effect.

In the Upper Tribunal Tax and Chancery Chamber case of HMRC v Shields (2014) the respondent had got planning permission for an Equestrian Facilities Manager’s residence at his equestrian centre at 274 Bangor Road, Newtownards in Northern Ireland.

The planning permission contained a condition saying “the occupation of the dwelling shall be limited to a person solely employed by the equestrian business at 274 Bangor Road, Newtownards, and any resident dependants.

Upholding HMRC’s appeal the tribunal said a condition of planning permission for a dwelling that required it to be occupied by a person who works at a specified location prohibited the use of the dwelling separately from that specified location.

The dwelling at 274 Bangor Road could only properly be used to provide accommodation for a person employed in the equestrian business at that address.

Any use of the dwelling at 274 Bangor Road “separate from” the equestrian business at that address was, therefore, prohibited by Condition 3.

That was a “prohibition” within the meaning of Note (2)(c) to Group 5 of Schedule 8 to the Value Added Tax Act 1994 and the dwelling was not, therefore, a building “designed as a dwelling” under HMRC’s DIY Builders’ VAT Scheme.

It followed that HMRC was right to deny a VAT refund on the construction costs.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.