How to stop customs making a meal of it

Housing associations are major property developers and are generally only able to make very small recoveries of VAT.

At 17.5% VAT is therefore a major cost, making it vitally important to ensure that irrecoverable VAT is properly budgeted for, and, wherever possible, properly mitigated.

However a case decided on 15 October 2004 [LON/2003/0344] widened the scope for getting reduced VAT when units are classed as “self-contained”.

Agudas Israel Housing Association appointed a contractor to construct a third floor addition to an existing care home for the elderly. The new floor contained eight residential units and a communal area.

HM Customs and Excise was of the view that such works were standard-rated for VAT purposes, whereas Agudas considered the works to be zero-rated.

Something to dwell on

The appeal focused on the interpretation of Note 2 to Group 5 of Schedule 8 of the VAT Act 1994, and specifically whether dwellings were created, and whether they produced self-contained living accommodation.

The amount of VAT involved was significant for the association.

The units were for permanent accommodation for the tenants. Funding was on the basis that the units would be “lifetime” homes that would allow flexible independent living for frail, elderly residents suffering from varying degrees of Alzheimer’s disease and requiring different levels of care. Tenants would be supported both by their own families and social services.

A communal staircase would provide access to the third floor and there would be a communal seating area and office space. Each unit consisted of a bed sitting room with en suite shower, and facilities for a fridge, kettle and microwave, although residents could take meals in their own rooms or in the dining area available elsewhere in the building. Each tenant was to have a residency agreement and, crucially, as far as the tenants were concerned this was their home.

Agudas was of the view that the construction created eight new self-contained flats and that the works to create the flats should be zero-rated for VAT purposes.

Customs says no

But customs argued that the planning intention was to integrate the third floor with the rest of the building, and the presence of so many communal facilities, along with the lack of provision for food preparation, meant that the construction was an extension.

Customs therefore felt that it failed to qualify for zero rating.

The tribunal was asked to consider a number of decisions, including Uratemp Ventures Ltd v Collins [HL, 2001, 3 WLR 806], Amicus Group [2002, No 17693], University of Bath [1996, No 14235], Oldrings Development Kingsclere Ltd [2002, No 17769], Kingscastle Ltd [2002, No 17777], Nick Hopwell-Smith [2000, No 16625], Look Ahead Housing Association [2000, No 16816], St Catherine’s College [1980, 1 WLR 66] and University of Kent [No 18625].

It was held that each unit was a dwelling because it was where the resident lived, regarding it as their home. It did not cease to be a dwelling simply because meals may be taken elsewhere.

Further, in the absence of much guiding case law on the meaning of “self-contained”, the tribunal went on to hold that “in the 21st century, premises with their own front door, en suite bathing facilities and the ability to cook with a microwave cooker and a kettle are self-contained living accommodation.

“The factor of the limited nature of the cooking facilities is outweighed by the factor of the direct access [to the square] from a resident’s own front door to which he or she has his or her own key.”

This is likely to provide future guidance on the meaning of “self-contained” in this difficult area of VAT interpretation.

Agudas’ success means that this is an important decision. It is undoubtedly the case that in many similar situations customs – and indeed the professional adviser’s – initial reaction would be to treat the development as an extension, which is therefore standard-rated.

The existence of frail and elderly tenants requiring care and attention and living in units partially integrated with the accommodation provided on other floors of an existing care home, including dining facilities, certainly leads to this conclusion.

It is possible that customs might argue that the circumstances in Agudas are unique. However, if in applying the above guidance it can be demonstrated that a construction does in fact provide self-contained dwellings for residents, then the level of care and integration becomes secondary.

As a result, it should be possible to achieve zero-rating, bringing considerable VAT savings. Associations may wish to review recent development work to assess whether zero rating may be achieved where VAT has been charged.