Are you involved in the construction, sale, or operation of care homes?

You may be entitled to a VAT refund!

Following the Tribunal decision in Pennine Care NHS Trust [2016] UKFTT 0222 (TC) HM Revenue & Customs (HMRC) has changed its policy regarding when the zero rate of VAT applies on the construction and sale of new care homes. In essence, the very favourable zero rate of VAT is relevant to more buildings than HMRC previously allowed. Affected businesses; including construction businesses, property developers and care home operators; could be entitled to VAT refunds.

The zero rate of VAT is favourable because it allows the building contractor to recover VAT on the costs they incur, for example the cost of machinery, materials and other relevant costs, without charging the customer VAT.

The legislation provides for the zero rate of VAT to apply when a building contractor is engaged to construct a relevant residential purpose building. Care homes and hospices are examples of relevant residential purpose buildings. A hospital is not a relevant residential purpose building and VAT at the standard rate is charged on the construction of hospitals.

At issue in Pennine Care NHS Trust was whether the building, which cost approximately £10 million to construct, was a hospital or a care home. HMRC had argued that it was a hospital but the Tribunal decided it was a care home. On 28 July 2017 HMRC announced that it had accepted the Tribunal decision and revised its policy.

Although the Tribunal decision was about the VAT treatment of construction services, it is also relevant to the VAT treatment of the sale of new buildings by property developers.

Revenue and Customs Brief 2 (2017) sets out the revised HMRC policy regarding the distinction between care homes and hospitals and the HMRC policy regarding claims for VAT refunds.

Please contact the Garbutt + Elliott VAT team if you believe you may be entitled to a VAT refund or would like advice about the VAT treatment of your income or costs.