Article by Mike Arnold, partner, PricewaterhouseCoopers’ Indirect Tax Solutions Team.
Published in the August 2001 issue of Tax Adviser.
The new rules, effective from 12 May 2001, introduce new reduced rate reliefs at five per cent for certain qualifying works. However, a large number of definitions, key terms and conditions are used (at least twenty-three) making interpretation by those most likely to need to interpret them (building contractors) somewhat fraught. Certain key definitions are identified by italics and are explained below in the text. The question is whether Customs & Excise (Customs) have made this more complicated than necessary. All legal references are to the final destination in VATA 1994 Sch. 7A when the new reduced rate schedule is eventually consolidated. Thus it is hoped the article may stand the test of time!
The reliefs apply to the following, regardless of the location in the United Kingdom:
(1) qualifying services, where, if planning permission or building control approval is required, it has been received, in relation to a qualifying conversion ( VATA 1994, Sch. 7A, Grp. 6, Item 1) which means:
(a) a changed number of dwellings conversion – which is exactly what it says it is(!);
(b) a house in multiple occupation conversion; or
(c) a special residential conversion;
(2) qualifying services in relation to the renovation or alteration, including extension, of a single household dwelling that has not been used as a dwelling for at least three years (VATA 1994, Sch. 7A, Grp. 6, Item 1).
Customs has issued Information Sheet 4/01 dated May 2001 (available on-line at www.hmce.gov.uk) on the subject. It details the changes and sets out examples of how it will be interpreted in practice.
Qualifying services
A supply of qualifying services for the purposes of the conversions listed above means (VATA 1994, Sch. 8A, Grp. 6, Note 11)):
(1) works to the fabric of the building (or the relevant part thereof);
(2) works within the immediate site (and in the case of the conversion of part of a building, the building itself) in connection with:
(a) means of providing water, power, heat and access;
(b) means of providing drainage or security for the building; and
(c) provision of the means of waste disposal.
Work in relation to a garage also qualifies if carried out at the same time as the works of conversion and occupied as part of that conversion.
Changed number of dwellings conversion
A changed number of dwellings conversion means (VATA 1994, Sch. 7A, grp. 6 Note 1):
(1) a conversion of premises consisting of a building where the conditions specified in this paragraph are satisfied, or
(2) a conversion of premises consisting of a part of a building were those conditions are satisfied. Those conditions are:
(a) after conversion, the converted premises contain a number of single household dwellings (VATA 1994, Sch. 7A, grp. 6, note (4)) that is:
(i) different from the number (if any) that the premises contain before conversion; and
(ii) greater than or equal to 1;
(b) no part of the converted premises is to contain the same number of single household dwellings (whether none, one, two or more) as before the conversion (Note: Reference to none here means that a conversion to one or more single household dwellings from commercial qualifies for the reduced rate of five per cent.)
The effect is that the actual number of single household dwellings must change from what was there before, whether in relation to the entire building if the conversion related to the whole building or in relation to the part that has been converted. Customs also indicate that where a complete building such as a five floor block of flats with five flats on each floor is converted to four floors with six flats on each and one floor with one flat, five per cent will apply to all work as each part converted, i.e. each floor, has a changed number of dwellings.
House in multiple occupation conversion
A house in multiple occupation conversions means (VATA 1994, Sch. 7A, Grp. 6, Note (5), Item 1):
(1) a conversion of premises consisting of a building where the conditions below are satisfied; or
(2) a conversion of premises consisting of a part of a building where those conditions are satisfied.
(3) Those conditions are:
(a) pre-conversion the premises contain only a single household dwelling or two or more such dwellings;
(b) post-conversion those premises contain only a multiple occupancy dwelling or two or more such dwellings; and
(c) the use to which those premises are intended to be put after conversion is not to any extent use for a relevant residential purpose (VATA 1994, Sch. 7A, Grp. 6 Note 6).
Special residential conversion
A special residential conversion means (VATA 1994, Sch. 7A, Grp. 6 Note 7)):
(1) A conversion of premises consisting of:
(a) a building, or two or more buildings;
(b) a part of a building, or two or more parts of buildings; or
(c) a combination of:
(i) a building or two or more buildings; and
(ii) a part of a building or two or more parts of a building where specified conditions (Notes (7)(2) to (7)(6)) are satisfied.
Those conditions are that
(1) pre-conversion the premises being converted contain only:
(a) a dwelling or two or more dwellings; or
(b) a dwelling or two or more dwellings and
(i) an ancillary outbuilding occupied together with the dwelling or one or more of the dwellings; or
(ii) two or more ancillary outbuildings each occupied together with the dwelling or one or more of the dwellings; and
(2) where pre-conversion the premises contain a multiple ccupancy dwelling or two or more such dwellings, the use to which that or any of those dwellings was last put pre-conversion was not to any extent for a relevant residential purpose (VATA 1994, Sch. 7A, Grp. 6 Note 7A); and
(3) the premises must be used post-conversion solely for a relevant residential purpose (RRP) (VATA 1994, Sch. 7A, Grp. 6 Note (6)) ); and
(4) where the RRP is an ‘institutional purpose’, the conversion must be intended to form after that conversion the entirety of an institution used for that purpose.
In addition, qualifying supplies of services and related materials must be made to the user of the building for a relevant residential purpose, and before the supplies are made the user issues a certificate in a prescribed form to that effect (VATA 1994, Sch. 7A, Grp. 6, Note (8)).
It would seem from the above that the creation of an annexe to an existing residential home from a building in the grounds of the original home will not qualify for relief. The conversion needs to create an entirely new home!
Empty house provisions
The reduced rate of five per cent is available for qualifying work carried out on a qualifying building, i.e. a single household dwelling, that has been empty for at least three years (VATA 1994, Sch. 7A, Grp. 6, Item 1). For these purposes ‘empty’ actually means that the dwelling has not been used as living accommodation for at least three years prior to the works of renovation taking place. It can, therefore, have been used for non-residential purposes such as storage for at least that period.
The reduced rate applies to the relevant qualifying works in two different scenarios, where:
(1) no-one has lived in the dwelling for at least three years prior to the relevant works being carried out; or
(2) no-one has lived in the dwelling prior to the owner acquiring it by way of the purchase of a major interest in it (i.e. freehold or a lease for a period exceeding 21 years or, in the case of Scotland, at least 20 years) and thus bringing that period of non-occupation to an end, during which period no works of renovation had been carried out, the relevant works are carried out for the owner occupier and are performed within 12 months of the acquisition of the dwelling. (VATA 1994, Sch. 7A, Grp. 7, Notes 3(1) and 3(2)).
The owner/occupier of the property will need to provide the builder with proof that the dwelling has not been lived in by reference to the Electoral Roll or Council Tax data, or the Empty Property Officers in local authorities. It will be the builder’s responsibility to obtain this information to support the application of the reduced rate.
Qualifying works on ‘empty’ single household dwellings
The relevant works are the services supplied and the related building materials. It does not include work of installing building materials not ordinarily incorporated in dwellings (VATA 1994, Sch. 7A, Grp. 7, Note 3(3)). The relevant works cover alterations, extensions, renovations including repair and maintenance but above all they must:
(1) be carried out to the fabric of the dwelling; or
(2) be carried out within the immediate site of the dwelling in connection with:
(a) a means of providing water, power, heat or access to the dwelling;
(b) a means of providing drainage, security or waste disposal to the dwelling
Further definitions
‘Single household dwelling’ means (VATA 1994, Sch. 7A, Grp. 6, Note (4)):
A dwelling that is ‘designed’ for occupation by a single household in relation to which the conditions set out below are satisfied, namely:
(1) the dwelling consists of self-contained living accommodation;
(2) there is no provision for internal access between any dwellings or parts of dwellings;
(3) separate use of the dwelling is not prohibited by covenant, statutory planning consent or similar provision; and
(4) separate disposal is not prohibited by such terms.
This means it covers a detached or semi-detached or terraced houses, maisonettes and flats.
‘Multiple occupancy dwelling’ means a dwelling (as defined above) that is designed for occupation by persons not forming a single household.
This in effect means bedsits and other shared accommodation in houses and flats; Customs also say in their Information Sheet 4/01 that it includes bed and breakfast accommodation with a mix of short and long stay residents, but not hotels, granny annexes and accommodation for au pairs, guests or lodgers(!).
‘Relevant residential purposes’ means (VATA 1994, Sch. 7A, Grp. 6, Note 6) use as:
(1) a children’s home;
(2) residential care home for those in need due to old age, disablement, drug dependency or mental illness;
(3) a hospice;
(4) residential accommodation for students/school pupils;
(5) residential accommodation for members of the armed forces;
(6) a monastery, nunnery or similar establishment; and
(7) an institution which is the main residence for at least 90 per cent of all residents (but excluding use as a hospital, prison (or similar) or an hotel (or similar).
An ‘institutional purpose’ within the scope of application of the relief to RRP buildings means those institutions listed at (1) to (3) and (6)/(7) above (VATA 1994, Sch. 7A, Grp. 7, Note (7)(7)).
Conclusions
If you have understood the above, I need provide no summary but on the assumption it would help, here goes:
What work and related materials are relieved:
(1) commercial to single household dwelling;
(2) single household dwelling(s) to a different number of single household dwellings;
(3) single household dwellings to multiple occupancy
dwellings;
(4) single house and/or multiple occupancy dwellings to relevant residential purpose building(s) (but will need to constitute the entire institution in most cases);
(5) renovation of single household dwellings not used as dwellings for at least three years.
What work and related materials are not relieved and thus remain liable to VAT at 17.5 per cent :
(1) commercial to multiple occupancy dwellings or a relevant residential purpose buildings (unless a housing association);
(2) creation of new dwellings where the number overall does not change;
(3) renovation of empty multiple occupancy dwellings and relevant residential purpose buildings.
The question is whether these reliefs will be widely accepted and become operable; and whether they are unduly restrictive in their scope. Operators of certain residential care homes such as hospices and children’s homes can not be best pleased given the incentive appears to be to acquire a new home rather than create annexes to an existing one. Perhaps we shall see refinements over the years ahead to accommodate this.
Technical Department
020 7235 9381
August 2001 by Mike Arnold
