HMRC has recently clarified its policy on the VAT treatment of conversions carried out under permitted development rights (PDR).
PDRs are a national grant of planning permission for particular types of development. They are intended to streamline the planning process by removing the need for full planning permission. Of particular relevance to farmers is the PDR allowing the conversion of certain agricultural buildings into dwellings.
What are the VAT implications of PDRs?
The VAT legislation is fairly generous where the creation of new dwellings is concerned. Building services will qualify for VAT relief, either at the zero rate for new construction or at the reduced rate of 5% for conversion works. In addition, any VAT incurred on the creation of a new dwelling will be recoverable if the dwelling is to be sold (zero rated) and a claim may be made under the DIY House Builder Scheme if the dwelling is to be retained for private use.
However, it is a requirement of the VAT relief that certain conditions are fulfilled. One of these is that planning permission must have been granted in respect of the dwelling and the construction must have been carried out in accordance with that permission. If this condition is not met, the standard VAT rate of 20% will apply to all construction work and VAT recovery is unlikely to be possible.
This has led to concerns that PDRs, in an attempt to make minor building works easier, have actually increased the costs of such projects by preventing the VAT relief that is dependant upon the grant of full planning consent. HMRC had previously suggested to the NFU that it would not take this point. However, the position remained confused with developers and landowners unsure about where they stood.
HMRC has now issued Revenue & Customs Brief 9/16 providing this long sought-after certainty. It has said that it will continue to require evidence that work is lawful in order for VAT reliefs to apply or for a claim to be eligible under the DIY House Builder Scheme. Where a conversion is covered by a PDR rather than a specific planning consent, this must be evidenced by at least one of the following:
- Written notification from the LPA advising of the grant of prior approval, or
- Written notification from the LPA advising that prior approval is not required, or
- Evidence of deemed consent and evidence that the development is a permitted development.
A last thought
It is worth noting the often overlooked point that VAT relief is also dependant upon there being no restriction on the separate use or disposal of the new dwelling. If the planning consent requires a building to be occupied by the employee of a particular business, for example, VAT relief will not be available.
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