An article on the VAT aspects of the Pre-Budget Report by Clare Mainprice, Associate Director, VAT Services at Baker Tilly Chartered Accountants
Published in the January 2001 issue of "Tax Adviser
The Pre-Budget Report contained nuggets on VAT buried in a joint press release from the Treasury and the Department of Environment, Transport and the Regions. These little bits of hope have been promised as a spin-off from Lord Rogers’ Urban Task Force report Towards an Urban Renaissance, which advocated the re-development of ‘Brownfield’ sites in preference to more suburbia.
The tax and VAT reliefs are designed to ‘go a considerable way towards harnessing the potential of derelict and under-used buildings and sites and [to] bring them back into productive use’. Both John Prescott and Dawn Primarolo blew the trumpets heralding this new day, the former talking about the disadvantaged and the latter about targeted tax cuts. Thus the clear policy driver is there, and the tax reliefs should follow it. There may well be more in the future.
Some specific provisions on direct tax were announced. They included some fairly blanket reliefs, such as a total waiver of stamp duty on property transactions in these disadvantaged areas, and 100 per cent capital allowances for the conversion of redundant commercial premises (such as unused space over shops, etc.) into flats for letting. There were also some VAT provisions and a promise to consider a favourable tax regime (unspecified) for Urban Development Companies.
The relief for residential property conversions has been extant in VAT since the mid 1990’s. This relief is the zero rating of the conversion of commercial premises to residential ones introduced in March 1995 by amending VATA 1994, Sch. 8, Group 5, item 1. That relief added to the zero rating for new construction zero rating for the conversion of a non-residential building or part of a building into dwellings or for use for a relevant residential purpose. However, this zero rating depends on the grant of a major interest (over 21 years) in the building, dwelling or its site, i.e. the conversion must be sold.
The HMT/DETR press release seems to promise that the Group 5, item 1 zero rating will be extended to include a five per cent VAT rate for the conversion of non-residential premises into dwellings which are then let. Thus if you are selling the property your conversion work is zero rated, while if you only let it, the five per cent rate applies. However, it is also possible to read this gnomic utterance as removing the requirement in Group 5 for the property never to have been used for residential purposes since 1 April 1973, (i.e. if it has been, you lose zero rating, but gain the benefit of the five per cent rate on the building works).
We will have to wait until the Budget to see which of these alternatives the press release means, or if it means both of them. However, there will certainly also be additional provisions in the Finance Act 2001 for giving builders end use certificates to get the five per cent VAT relief, as well as the current ones for zero rated works. With associated penalties, of course.
Group 5, item 3 applies the item 1 zero rating relief to ‘relevant housing associations’. These housing associations trade in what is known as ‘social housing’ for letting to the disadvantaged – i.e. poor. It would seem sensible, given the policy drivers of the new reliefs, to extend the item 1 zero rating to all non-residential buildings converted for letting in disadavantaged areas. After all, no bloated plutocrats are going to want to live in a slum, and the more renovated housing available in run down areas the better. Still, 5 per cent is better than 17.5 per cent, and avoids any possible argument with the EU over alleged extensions of the zero rate.
The second VAT relief will be ‘removing the VAT burden on’ (i.e. presumably giving a zero rate to) developers renovating and selling houses which have been empty for at least ten years. To get the item 1 relief the property needs to have been non-residential (note not necessarily commercial) since at least 1 April 1973, when VAT started. Are there EU problems ahead (see above)? If not, why is the first relief only a five per cent, not a zero, rate?
A final promise is that the EU Commission will be asked to give a reduced rate to repairs to listed buildings that are places of worship. While this is a laudable attempt to include all faiths, what if a banker claims his building is used to worship the god Mammon (a charge often levied from the pulpits of more recognised faiths) and demands the reduced rate for its repairs? On a more serious note, if listed buildings used as churches and temples get zero rating, the pressure will be on from the National Trust, older Universities and many other charities to get similar relief for their repairs. And repairs have always been standard rated, ever since VAT started in 1973. However, given the run down state of much of central Brussels, the EU may well grant the derogation to the UK, with a view to avoiding criticism when it grants a similar one to itself.
These promised tax and VAT reliefs are given explicitly ‘to encourage additional conversion of properties for residential use’. They may well help to achieve this aim, and no one advising property developers or many charities can afford to be unaware of them.
020 7235 9381
January 2001 by