VAT on construction of a holiday home

My client is having a house built which, in all respects, looks like a normal house. She is, however, only planning to rent the house out for holiday rentals because of the area it is in. She is not VAT registered and does not expect the holiday rentals to exceed the VAT registration threshold and has no other sole trader income. Can she still get zero-rating on the construction services?

If the new house meets the definition of “designed as a dwelling”, the construction services can be zero-rated in the normal way, irrespective of what the client plans to do with the property. “Designed as a dwelling” is defined in HMRC Notice 708 para 14.2 and, importantly, includes the requirement that the house must be capable of separate use and disposal (for example can be used and sold separately to any other building or business unlike, say, a typical granny annexe).
 
A statutory planning, covenant or similar restriction on the ability to reside in the property year-round (or as a principal private residence) would not prevent the construction services from being zero-rated (although such a restriction would mean any subsequent sale of freehold or a long-leasehold by the client would not qualify for zero-rating – para 4.4).

Here to help
With more than 75 highly skilled tax and funding specialists, advising on over 2,000 complex tax issues each year, we work with your practice to provide up to date, practical solutions. If you have a client in a similar situation, or have a tax question of your own, we're here to help on 0345 223 2727. Or to find out more about our services, email taxmarketinguk@markel.com.

Tagged VAT