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Getting To Grips With VAT
Dave Brown, tax advisor to the Listed Property Owners Club writes on the implications of amendments to how VAT applies to alterations to listed buildings.
The original law which allowed contractors to zero-rate approved alterations to listed buildings was withdrawn in the March Budget, but there was a subsequent concession which altered the timescale of the change.
Providing owners had applied for Listed Building Consent (LBC) before 21st March 2012, contractors should zero-rate the work up to 30th September 2015. Obviously the same original restrictions apply, namely that the work had to be an alteration, the work required and had received LBC and was undertaken by a VAT-registered contractor.
Separately there are other benefits available that may apply, although they are not necessarily restricted to listed buildings.
Other VAT reliefs - there is life after zero rating
These reliefs already exist and can often be applied alongside zero rating. For works being carried out after 1st October 2012 - for which zero rating is not available - this is the best you are going to get.
This can be applied in a number of situations:
Conversion of a non-residential property into a dwelling -
This will apply to a typical barn conversion or converting an office into a house; a chapel into a house; a pub into a house and so on, but it might not apply with the likes of a pub if, for example, it includes a self-contained flat above.
Where a domestic property has been empty for two years prior to work starting -
Here, you must be able to provide third party evidence to convince a sceptical VAT man that no one has lived in the property in the two years prior to the commencement of work. HMRC suggest proof from a local authority relating to council tax or electoral roll information. Alternatively, utility company information may assist. Otherwise, as HMRC put it: "Any other source that can be regarded as reliable." Note, however, that moving into the house before the work starts will negate the relief; moving in after work starts will have an effect on the extent of the relief. Please ask for full details.
A 'changed number' conversion -
As the name suggests, this is where the number of residential units within a building has changed, up or down, such as dividing a house into flats or changing a house from flats back into a single dwelling.
Installation of energy saving materials -
From draught-stripping windows and loft or wall insulation to full-blown wind or solar installations, the 5% VAT rate applies - but only on a supply-and-fit basis. One point to note is that if the insulation is part of a bigger job, the VAT rate applicable to that job will override the 5% rate. For instance, a roof replacement would be liable to VAT at 20% in full, even if it were insulated at the same time. On a brighter note, insulation within an extension that qualifies at the zero rate will also be liable to 0% VAT.
DIY HOUSEBUILDERS' SCHEME
A bit of a misnomer, as you don't have to do all the work yourself. In the following scenarios, if you have paid VAT in the course of the works you can potentially claim it back from HMRC. But beware - there is a fair bit of small print.
Building a new house from the floor up -
This would normally involve building on a bare plot, but if you demolish an existing property down to foundation level and start again you will qualify, as long as the new property is unaffected by any restrictive disposal conditions such as are often imposed on curtilage buildings. You can also qualify if you leave one wall of the existing property standing, but its retention would have to be at the insistence of local authority. Likewise, with a corner plot (such as at a road junction) you can leave two walls standing. This type of claim is restricted to a refund of 20% VAT on materials purchased direct. All building contractors should be zero-rating their supplies of labour and materials in any event.
Converting a non-residential building into a residential building -
Once again, if a new stand-alone dwelling is created you can make a claim for VAT spent out - either VAT charged by a contractor (labour and materials at 5% VAT) or for materials alone (20% VAT). But note the above comments about curtilage buildings - the newly created dwelling must be ‘stand alone' in terms of planning.
Refurbishing a residential property that has been empty for more than 10 years -
In all cases, a single claim is made within three months of completion of the work, but it is important to seek advice from the start of the project. If a contractor has incorrectly charged the wrong rate of VAT on a project covered by the DIY Scheme, the VAT will not be refunded by HMRC. It is somewhat difficult and often time-consuming to get contractors to re-issue invoices a couple of years after the event, so it makes sense to get it right from the beginning.
The removal of listed building zero rating will have a big impact on most owners and it is clear that the lobbying carried out by the LPOC has had an effect, evidenced by the September 2015 extension to the deadline mentioned earlier. It is also clear that HMRC is unlikely to make any further concessions. The only further advice to give is to be aware of the other reliefs, which are unaffected by the budget changes and take advantage of them wherever possible.
The Listed Property Owners Club has joined with a number of organisations to put pressure on the UK and European governments to establish a flat rate of VAT on all listed building work. Details of this can be found at www.cutthevat.co.uk/cut-the-vat/listed-buildings. Additionally there has been a suggestion that the 5% VAT by the UK government on energy efficient installations is illegal under European law and the coalition is being advised to increase this tax to the standard rate of 20%. Of course we are fighting this as hard as we can and again we shall keep you up to date with any developments.
Dave Brown is tax advisor to the Listed Property Owners' Club