VAT issues for cohousing groups – a case study

We find that groups struggle to find accountants who can provide the specialist tax advice needed, we want to share our experience to benefit you.

We at Wrigleys find that many groups find it hard to source accountants who can give them the specialist tax advice they need.  However, one of our groups has recently had to take highly technical VAT advice on their common house and wants to share its experiences to benefit other groups.

Stuart Croft (previously of Allotts Chartered Accountants, now of Allen, West and Foster Chartered Accountants) has prepared the following case study of Open House Project which highlights some of the issues surrounding VAT and cohousing groups and how these could possibly be dealt with:

Stuart Croft and Neil Highfield of Allotts Chartered Accountants became involved from the start of Open House Project some years ago.  The group was in the legal form of a limited company which required guidance on the requirements for accounts production and the filing required by Companies House.  It soon became clear that the accounting and taxation treatment of co-housing projects was not something that was familiar to HM Revenue and Customs (HMRC) and that specialist knowledge in this area was rare.  It was very quickly established that the individual residential units being constructed should be zero rated for VAT and as a consequence Open House Project should become VAT registered.

HMRC became interested in the VAT aspect of the Open House Project given that, in the early days, no VATable turnover was being generated and VAT was being reclaimed each quarter on the build costs.  A VAT inspector visited around the end of 2017 and opened an enquiry into the VAT intricacies of cohousing in this particular company environment.  The inspector raised a few routine issues which were easily dealt with  as well as identifying two small invoices which had not quite been processed correctly.

The main crux of the enquiry focussed on the common house and the common costs shared by all the units.  Stuart successfully argued that the majority of the VAT on the common costs could be recovered.  A summary of the outcome of the enquiry is that:

• For costs which relate directly to a residential unit, all VAT can be recovered (this is a zero rated supply).
• For costs which relate directly to the common house, no VAT can be recovered (this is not a VATable supply).
• For costs which do not relate to either, a proportion of the VAT can be recovered.  For example, this could be costs relating to a plant room or sa shared driveway.

HMRC rules do not say how the proportion of VAT recoverable on the shared costs is required to be calculated.  Therefore Stuart used the square footage of the units to proportion the VAT – as the square footage of the common  house was very small  compared to the other six residential units, the majority of the VAT on the build costs was successfully recovered.  Other means of apportioning the VAT could be used if they involve some form of logic which can be backed up to HMRC.

As the project is still ongoing, other challenges may arise but for the time being we can enjoy watching the award winning project come to fruition.

Stuart Croft is now employed at Allen, West and Foster Chartered Accountants in Sheffield whilst Neil Highfield remains managing partner at Allotts Chartered Accountants, based in Rotherham.