Andrew Needham points out a pitfall in the change of use of a relevant residential building and suggests possible ways to avoid a VAT charge.
What’s a relevant residential building?
The construction of a relevant residential building is zero-rated providing the owner issues a certificate to the builder certifying that it is for a relevant residential use. Relevant residential use covers such things as old people’s or children’s homes, school dormitories, student halls of residence, hospices etc. There were always rules that covered a change of use, but from 1 March 2011 HMRC changed the definitions of change of use, which can catch out the unwary on buildings completed after that date.
What is a change of use?
If, within 10 years of construction, the owner of a zero-rated relevant residential building changes its use he will have to pay some VAT back to HMRC based on time apportionment over that 10 year period, even if he is not registered for VAT.
Obviously if you obtain zero-rating for the construction of a building to be used as an old people’s home and you then convert it into offices, or let it to a tenant who converts it into offices, then you would expect a change of use charge to be triggered and have to pay back a proportion of the VAT.
On the other hand, a 'change in use' charge would not apply where all or part of the building is let to someone who continues to use it solely for a qualifying purpose. So if the original owner leased to another company that ran it as an old people’s home no adjustment would be required.
Trap:
HMRC says that if there is a transfer of a going concern (TOGC) and the freehold of the building is sold as part of the TOGC, the seller will then need to account for a 'change in use' charge no matter how it used by the new owner. In one recent example, a chain of care homes reorganised its structure and transferred one home to a new company in the group. As it had been built after 1 March 2011 they got a huge bill for change of use, even though it was still a care home!
Tip:
If the transferor does not transfer their entire interest in the building, then they need only consider a 'change in use' charge based on how the building is being used (its occupied use).
Example - Demolition of the building
No ‘change in use’ charge is due if a relevant residential building is demolished to ground level within 10 years of completion.
However, if after five years the care home is converted into apartments, then you would have to account for a self-supply charge.
How does it work?
The adjustment mechanism treats the value of the original supply that attracted the zero rate of VAT as standard-rated, but adjusts that value according to the proportion of the building that is affected by the change in use and the number of complete months that the building had been used solely for a qualifying purpose prior to the change in use. VAT is then accountable at the standard rate on the charge calculated.
Practical Tip:
If you want to transfer part of a care business into another legal entity and the property was built after 1 March 2011, then either grant a long lease in it rather than a sale, or retain a small interest in the building – sell 99% of the freehold. As there is no sale and use would remain the same the charge would not apply.
