There is a common misapprehension, often held by the owners of listed properties, and in particular listed dwellings, that all work carried out on their property is eligible for zerorating. The good news is that work to listed buildings can be zero-rated but a number of conditions must be fulfilled.
What are the conditions?
lThe building must be, or intended to be, used either as a 'dwelling' or for a 'relevant residential' or 'relevant charitable' purpose; lthe building work requires and receives listed building consent in order to be carried out; and lthe work consists of an alteration to the fabric of the building.
What buildings qualify?
The definition of a dwelling is relatively straightforward, although it is important that it must be self-contained and independently saleable.
A building is deemed to be used for a 'relevant residential' purpose, where it is:
a children's home;
a home for the care of those requiring it by reason of old age, disability, alcohol or drug dependency, or mental disorder;
a residential accommodation for students or schoolchildren;
a residential accommodation for the armed forces;
a monastery, nunnery or similar; or lan institution which is the sole or main residence of at least 90 per cent of its residents.
A building for a 'relevant charitable' purpose qualifies where it is used:
by a charity otherwise than in the course or furtherance of business; or lby a charity as a village hall or similarly in providing social or recreational facilities for the local community.
What residential buildings do not qualify?
A building will not qualify if it is a hospital, prison or similar institution, or a hotel, inn or similar establishment.
Defining an 'alteration to the fabric' of the building It is this condition which trips up many owners of protected buildings.
Listed- building consent may be required for many works, which do not amount to alterations in this sense. Therefore, where the work done comprises, in part, alterations to the building and, in part, repair and maintenance, it is necessary for the builder to apportion the value of the work done, zero-rating the alterations and charging VAT on the repair and maintenance.
Where any repairs or maintenance are merely the consequence of alteration works, such as making good, they may be treated as a necessary part of the alterations and zero-rated accordingly. Conversely, if an alteration is a mere by-product of works, which are essentially in the nature of repair and/or maintenance, it will not be eligible for zero-rating.
There is some discussion as to where the borderline falls between alterations and repair/maintenance, and this has been the subject of a number of tribunal cases. By and large, it is a matter of sensible judgement. What is quite clear is that Customs is far more inclined to accept an apportionment without question, where it has been sensibly carried out in advance.
Is repair and maintenance always 'vatable' at 17.5%?
No. There are now circumstances where the 'vatable' element of work to a listed dwelling is rateable at 5 per cent, rather than 17.5 per cent. If any part of a reduced-rated project qualifies for zero-rating under the provisions described in this article, that element may be zero-rated, leaving the rest of the project subject to VAT at 5 per cent. For an explanation of how the reduced rate applies to construction services, see the article 'Avoiding VAT adds value' (AJ 18.9.03).
An example of this would be the conversion of a listed barn to a dwelling. Where all three conditions set out in this article have been fulfilled, zerorating will Apportioning costs In cases where skirting boards have been replaced throughout a listed building, for example, and where one room has them installed for the first time, the fixing of the skirting boards in that one room constitutes an alteration, whereas the remaining skirting boards are treated as repair and maintenance.
Some costs are neither repairs nor alterations, such as supervisory work done by the contractor's staff. Proportions have to be worked out. For example, if the value of alteration is, say, £10,000 and the value of repairs is £5,000, the other costs could be worked out as two thirds/one third to the zero-rated and standard-rated costs of the overall contract.
Neil Owen is a VAT specialist at Langdowns DFK. For further information, contact 023 8061 3000