Article by Denis Holly, Technical Director of Liaison VAT, published in the May 2001 issue of Tax Adviser. By introducing grants in the Budget, the Government admitted that it could not apply the lower rate of VAT to renovations for listed places of worship whilst it could on the conversion of property to dwellings. This article looks at why this is so. It looks at the background to the proposed reductions and explains why sometimes a member state can reduce the VAT rate and at other times it cannot.
In his pre-Budget statement in November, the Chancellor announced a number of VAT reliefs in the press release £1 billion package to regenerate Britain’s towns and cities. Interestingly, the information was hidden away in the Inland Revenue’s press releases and not, as you might expect, in those of Customs and Excise – so you had to look hard to find it.
Two proposed reliefs were put forward to reduce the VAT incurred on costs related to housing. The first was in response to the Urban Task Force report under Lord Rodgers, which contained 105 recommendations on reversing urban decline and attracting people back into the cities. This involves a reduction of the VAT rate from 17.5 per cent to five per cent on the cost of converting non-residential buildings into residential property, or where a dwelling is subdivided. The intention is to make it cheaper to redevelop older properties, often in the cities, so as to reduce pressure on green field sites where the VAT on new build could largely be recovered.
The second relief was a similar reduction in the rate of VAT on repairs and renewals relating to places of worship which are listed buildings.
The sixth directive affects both events, but whereas Gordon Brown will be able to push the conversion change through without difficulty, the worship changes are bogged down by the difficulty of getting the approval of our European partners.
So why the difference?
The sixth directive
Article 12(3)(a) of Directive 77/388, the sixth directive, provides that member states may have either one or two reduced rates, which may not be less than five per cent. There is, however, a qualification. Lower rates can only be applied to goods and services specified in Annex H of the directive which states the UK has five per cent and zero (even though to the mathematically minded this is rather less than the limit).
The UK obtained its zero rate by virtue of a number of derogations agreed under art. 27(5). These had to be notified to the European Commission by 1 January 1978 and be for clearly defined social reasons or for the benefit of the final consumer. These are almost cast in stone though a number have been lost over the years, such as zero-rating on the sale of new commercial buildings. However, there have been no additions. But more on derogations later.
Category 9 in Annex H covers ‘the supply, construction, renovation and alteration of housing provided as part of a social policy’. The treatment of housing has always been a social element of government policy, as witnessed by the zero rating of the construction of new dwellings and the recently abolished mortgage interest relief.
So there is no problem slotting in the reduced rate here. Incidentally, the recent reduction of VAT on sanitary protection was possible as this is an item specifically included under category 3 of the same annex.
Unfortunately, category 9 does not cover renovation or repairs to churches as it is obvious that they do not qualify as housing. You will no doubt be aware that alterations to listed buildings can be zero-rated but not repairs. This is because this zero rate is available under the derogations obtained in 1978.
The social purpose here is presumably the maintenance of the national heritage by ‘compensating’ the owners for the extra cost of altering their buildings according to planning controls. It is interesting to speculate why the cost of alterations to such a building should gain the benefit of zero-rating but not the cost of repair.
As zero-rating is not a possibility, one has to live in the real world and accept the only relief that seems to be available to help listed buildings owners with their repairs is a lower rate. As a lower rate is clearly not available under Annex H, derogation needs to be sought to get one. But how do you go about this?
In principle, this is a straightforward procedure under art. 27(1). The Government simply informs the European Commission that it wishes to add repairs of listed buildings used for worship to Annex H. Then the clock runs for one month to allow the Commission to inform members and then two months more to allow members to object. If nobody objects then the derogation is approved in three months.
But if an objection is made the problems mount up – and there is likely to be one in this case. In my view, the request does not appear to meet the conditions for an approval. It is not sufficient simply to decide you want to have a lower rate for whatever reason. The government must be able to show that the derogation is made:
• to simplify procedures for charging VAT; or
• to prevent tax evasion or avoidance.
Furthermore, any simplification procedure must not affect the amount of tax due at the final consumption stage, except to a negligible amount.
We need to ask if the application meets the conditions. How is a lower rating for repairs a simplification measure? This area normally covers measures such as cash accounting and retail schemes. Similarly, it is hard to argue a reduction in the VAT rate will only have negligible impact on the tax take. It is hardly an anti-evasion or avoidance measure either. The cynics may say that as it must be approved unanimously by the Council of Ministers, who never agree on anything, it has very little chance indeed. Perhaps it will only happen if it is used as a pawn in a political fix.
Rumours did suggest that a derogation might be accepted in 2003, but as it did not fit with the Government agenda it was announced in the Budget that grants are to be offered instead of a VAT rate reduction. This will cover any extra VAT incurred where the higher rate is charged on qualifying expenditure. A nice political fix!
The difference in treatment between the two proposals illustrates the need for the government to consider the ramifications of the sixth directive before making any proposal for changes in VAT legislation. If you cannot do something because of European law, any kudos you may receive initially will soon turn to brickbats as the issues rumble on.
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May 2001 by