23 June 2016

Development Q&A

Development Q&A: Permitted Development Rights and applicable VAT rates, Mrinalini Rajaratnam answers your questions.

Q:     We are in the process of converting an office block into residential dwellings under permitted development rights set out in the General Permitted Development Order. There is no individual statutory planning consent.  Are we still entitled to zero-rate the sale of the newly converted residential units and apply the reduced VAT rate of 5% to the construction costs?

A:      One of the conditions that a developer has to satisfy in order to zero-rate the first sale of a newly converted residential unit or apply the reduced VAT rate of 5% on construction supplies, is to evidence that there is a statutory planning consent for such conversion and the conversion has been carried out in accordance with such consent.

The Government introduced additional permitted development rights ("PDRs") to simplify and speed up the planning process. These PDRs permit, without the need for individual planning consents, the change of use into dwellings of buildings that were previously used for the other purposes - such as offices, financial and professional services, betting offices, pay day loan shops, amusement arcades or centres, casinos, storage or distribution centres and agricultural buildings.

These PDRs are subject to specific limitations and exclusions set out in the legislation. Some PDRs may require the prior approval of the local planning authority ("LPA") for matters such as flooding, transport and highways and contamination.  Where this is the case, the LPA must grant or refuse to give prior approval, or advise that prior approval is not required, within 56 days of such an application being received. If the LPA does not respond within this time period, the developer is deemed to have consent and the conversion can proceed in accordance with the details specified in the application.

HM Revenue and Customs clarified in May 2016 that where conversion into dwellings has been carried out under PDRs, the developer is still entitled to zero-rate a sale or long lease and apply the reduced 5% rate to VAT on some supplies, provided that there is evidence of one of the following:

  • Written notification from the LPA advising of the grant of the prior approval.
  • Written notification from the LPA that prior approval is not required.
  • Evidence of deemed consent. This would be evidence that you have written to the LPA and written confirmation that you have not received a response within 56 days.

The conversion must still meet the appropriate building standards.

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