HMRC has updated  VAT Notice 701/7 Reliefs from VAT for disabled and older people and published RCB 7 (2019) to clarify the scope of the VAT zero rate for restoring “lost space” following bathroom and washroom conversions for disabled people. The relevant VAT manual (VRDP11550) has also been updated

The law zero rates the supply to a disabled person of works to install, extend or adapt a bathroom, washroom or lavatory in the person’s private residence, where this is necessary because of their condition. This includes works that are necessary to restore the space lost when installing, extending or adapting the bathroom, washroom or lavatory.

For example, a disabled person needs to extend the size of an existing bathroom to accommodate changes needed because of their condition. In order to facilitate this, 25% of the adjoining room is used to create the extended bathroom. The law zero rates the extension works, including restoring the adjoining room to its original size where it becomes necessary as a result of the extension.

Until 18 December 2014, HMRC’s published guidance provided an explanation of this relief. However, from that date, the guidance no longer made any reference to the zero rate for works to restore the lost space.

The lack of specific guidance has led to a degree of uncertainty about the scope of the relief, and restoration of lost space. As a consequence, HMRC has included specific guidance in Reliefs from VAT for disabled and older people (VAT Notice 701/7).

HMRC has therefore chosen to provide a new, clearly defined concession. CTG reviewed the proposal when it was being formulated and consulted its professional members. Some of our Members had used the concession in the past and have found it useful, but they understand the need for it to be focused to avoid any misuse.

HMRC provides the following explanation of how the zero rate applies to such works:

• Where a bathroom, washroom or lavatory has been installed, extended or adapted in a disabled person’s private residence, because of their condition, the work may be zero-rated (this will refer to paragraph 6.3 in Reliefs from VAT for disabled and older people (VAT Notice 701/7)).
• If the works involved have reduced the size of another room within that private residence there will be ‘lost space’.
• Where, as a result of the works, it becomes necessary to restore the ‘lost space’, that work can be regarded as part of the work essential to the provision of the bathroom, washroom or lavatory. The restoration of that ‘lost space’, but only that ‘lost space’, by restoring the room itself to its original size, can also be zero-rated. This can be done through internal works or by extending outwards or upwards.
• The zero rate does not extend beyond the reinstatement of the ‘lost space’, so everything else, including converting another room in the residence to replace the lost room, will be standard-rated.
• If the works go further than the ‘lost space’ amount, that extra new space must be treated as standard-rated. An apportionment of the zero and standard-rated parts must be made, and further details can be found in VAT guide (VAT Notice 700).
• The ‘lost space’ amount that can be zero-rated must follow the exact specifications in floor measurements, or room volume, of the space lost.
• The application of the zero rate in these circumstances only applies to the reinstatement of ‘lost space’ in terms of building works. It does not extend to fixtures, fittings, units, and so on. However, the zero rate does apply to the provision of utilities that were available in the original converted room.

HMRC accepts that in order to restore the existing room to its original size in terms of floor space or volume, it may be necessary to extend the building.

HMRC also accepts that works to restore the lost space can include connection to the utilities. However, HMRC does not accept that works to restore the lost space go any wider so as to include, for example, the construction of fixtures – such as cupboards and fitted wardrobes, heating installation, installing new sinks – or the installation of white goods and fittings.

Period from 18 December 2014

Builders and their customers who followed the less detailed guidance in place until 18 December 2014 – and on the basis of it zero-rated works to make good the space lost to the bathroom, washroom or lavatory – need take no further action.

Where works were started prior to 18 December 2014, and progressed after that date, builders and their customers may continue to rely upon the guidance that was in place up to 18 December 2014.

In cases where works commenced after 18 December 2014, when guidance made no reference to works to make good lost space, and builders and their customers were unaware of the relief for such works, the zero rate may be applied retrospectively, based on the new guidance, and thus adjust the VAT charged on the works.

It is important to note, however, that such adjustments are subject to the 4-year cap – which starts from the accounting period in which the error was made.

For information on how to make adjustments see How to correct VAT errors and make adjustments or claims (VAT Notice 700/45). Please be aware of the 4-year cap, and the rules of unjust enrichment.