Permitted development rights (PD Rights) mean that commercial premises such as offices can be converted to residential use without the need for planning permission.
Developers should ensure that they are able to take advantage of the zero rate of VAT that is available on the sale, or grant of a long lease, of a building that has been converted from a non-residential to a residential use. The availability of the zero rate of VAT assists with the developer's VAT recovery position and can potentially eliminate VAT costs for any purchaser.
A non-residential to residential conversion will generally be zero-rated if the developer sells the freehold or grants a long lease of the building which is designed as a dwelling (or number of dwellings) and meets the four criteria set out in the VAT Act 1994. These are:
- The dwelling must consist of self-contained living accommodation;
- There is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
- The separate use or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; and
- Statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.
It is the fourth condition that will pose problems for conversions carried out using PD Rights, as no statutory planning permission is required.
HMRC has issued a brief that clarifies the evidence that will be needed in cases where a conversion takes place using PD Rights. Instead of statutory planning consent, the developer will need to provide one of the following:
- Written notification from the local planning authority advising of the grant of prior approval;
- Written notification from the local planning authority advising that prior approval is not required; or
- Evidence of deemed consent and evidence that the development is a permitted development. This will include all of the following (where the documents have been created): plans of the development, evidence of prior use, confirmation of which part of the planning legislation is relied upon for the development and a lawful development certificate, where one is already held.
Whilst there is no change in VAT law regarding zero rating, there will be additional evidential burdens to satisfy HMRC as to zero rating of sales of converted buildings using PD Rights.
Developers will welcome HMRC's clarification of the PD Rights position and the evidence it will expect a developer to obtain. Going forward, it will be important for developers to retain that evidence should HMRC ever query the VAT status of their supplies of converted buildings. Failure to comply runs the risk of HMRC denying the zero rate treatment which could result in unexpected VAT costs for the developer.
Contributor: Alexandra Holsgrove Jones
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.