Zero-rated VAT: Approved Alterations to Listed Buildings

We have been asked by many client’s to clarify the implementation of the removal of Zero-rated VAT for alterations to Listed Buildings on the 1st October 2012. The content on this page is taken ‘word-for-word’ from a document issued by the HMRC. Unusually, it is very clear about the change, so I have not sought to change or clarify anything further concerning the following content.

Please note the last paragraph about ‘Anti-forestalling legislation’ which basically means if you try to evade the VAT by say, asking your builder to raise a zero-rated invoice for the work, prior to completion before the 1st October, this is illegal.

Please also note the exceptions in the paragraph headed ‘Transitional arrangements… where a contract was entered into before 21 March 2012″.

It is interesting that in additional information from the HMRC documentation, “Economic Impact: This measure might lead to a small increase in the price of alterations to listed buildings which would lead to a fall in demand.” infers the current 20% VAT has a small impact. I’m not sure that an owner of a Listed Building would agree. Work previously costing £250,000 will now cost £300,000. When considering the onerous costly requirements of Conservation Officers which already make work on Listed Buildings considerably more expensive than on non-listed properties, it is by no means a ‘small increase’ and quite a disincentive to owning and carrying out work on a Listed Building, which could leave many of them falling into disrepair.

Who is likely to be affected?

Businesses carrying out approved alterations work to protected buildings – listed buildings or scheduled monuments which are dwellings or are used for a relevant residential or a relevant charitable purpose. Owners and developers of these buildings.

General description of the measure

The measure will result in

i) all building materials and construction services supplied in the course of an approved alteration to a protected becoming subject to VAT at the standard rate and

ii) a narrowing of the circumstances in which the first sale or long lease by a developer of a substantially reconstructed protected building can be zero-rated, so that only buildings reconstructed from a shell continue to benefit from the zero rate.

VAT: Approved Alterations to Listed Buildings

Policy objective

Removing the zero rate removes a perverse incentive to change listed buildings rather than repair them and ensures that all alteration works receive the same tax treatment. The change makes the VAT rules simpler for businesses to understand and for HM Revenue & Customs (HMRC) to administer and reduces the scope for error and non-compliance.

Background to the measure

The repair and maintenance of a protected building is standard-rated, but the approved alteration of a protected building is zero-rated. Some alterations restore or enhance the unique character of a building or prolong its active life, but most work covered by the relief is extension work which is unnecessary for heritage purposes. Alteration work on other types of building is standard-rated so owners of listed buildings receive a tax advantage over owners of other types of building.
This measure was announced at Budget 2012 and a consultation document entitled VAT: Addressing Borderline Anomalies was published together with draft legislation.

Detailed proposal

Operative date

The measure will have effect on supplies made on or after 1 October 2012.
Transitional arrangements will be put in place to protect contracts entered into before 21 March 2012.
Anti-forestalling legislation will apply to supplies made on or after 21 March 2012.

Current law

The current law is Group 6 of Schedule 8 to the VAT Act 1994. Zero-rating applies to approved alterations to a listed building and to the first sale or long lease by a developer of a substantially reconstructed listed building. The zero-rating applies to buildings used as

i) a dwelling

ii) a residential building such as a nursing home or student accommodation

iii) a building used by a charity for non-business purposes such as a place of worship or as a village hall or similar.

Proposed revisions

Secondary legislation will amend Group 6 to:

i) remove Items 2 and 3 which zero rate construction services and building materials in the course of an approved alteration and

ii) remove the test in Note 4a which zero-rates the first sale or long lease of a substantial reconstruction where 60 per cent by value of the work is an approved alteration.

Transitional arrangements will be put in place so that where a contract was entered into before 21 March 2012 or in the case of a substantial reconstruction at least 10 per cent (measured by reference to cost) of the reconstruction of the protected building was completed before 21 March 2012 then

i) any supply of building materials made from 21 March 2012 as a result of that contract can continue to be zero-rated until 20 March 2013 and

ii) the first grant of the completed building can be zero-rated until 20 March 2013.

Anti-forestalling legislation will be introduced in Finance Bill 2012 to prevent businesses entering into avoidance arrangements from 21 March 2012 in order to obtain zero-rating of the affected supplies from 1 October 2012.