VAT & Residential Purpose

The Upper Tribunal's decision in NHS Ayrshire & Arran Health Board matters to anyone planning VAT recovery on healthcare construction.

The Health Board had built a National Secure Adolescent Inpatient Service in the grounds of Ayrshire Central Hospital, treating young people aged 12 to 18 detained under mental health legislation. It did not claim zero rating for the whole building. Instead it argued that a twelve-bedroom accommodation wing was a distinct and separate part intended for use solely for a relevant residential purpose, which would allow the construction of that wing to be zero rated.

HMRC refused, on the basis that the whole facility was a hospital or similar institution. Buildings of that kind are excluded from the residential zero rating, and the wing could not be separated from the clinical whole.

The First-tier Tribunal dismissed the appeal in May 2025, finding that the primary purpose was the medical treatment of detained patients and that the bedroom wing formed part of that clinical environment rather than a separate residential home.

The Upper Tribunal agreed on every ground. No part of the building was intended for use solely for a relevant residential purpose. The wing's intended use was as part of a hospital, and because the facility's functions were interdependent, the tribunal was entitled to weigh the clinical use of the rest of the complex when judging the wing's character. The attempt to split the building for partial zero rating failed, and the construction costs remain standard rated.

If you are planning a healthcare or public sector build and want certainty on the VAT position, VITA can help.