12 C O N T E X T 1 2 8 : M A R C H 2 0 1 3 JOHN BARNES VAT changes on property alteration work Following the March 2012 budget, measures were introduced that will directly impact on charities and building owners involved in repairs and alterations to listed buildings. The zero rating of ‘approved alterations’ to listed charity buildings and dwellings has been a source of significant VAT savings ever since the tax was introduced in 1973. However, it gave rise to many queries and disputes with HMRC. In particular it was often difficult to decide which aspects of the work were alterations, and which were repair and maintenance of the fabric. This was significant as standard rateVAT applied to any works of repair and maintenance, and zero rateVAT only applied to ‘alterations’. For example, if a listed building had a concrete-tiled roof, due to an unsympathetic restoration in the past, and it was now planned to replace the roof in more traditional materials, would that be a work of maintenance or an alteration? HMRC would argue that it was maintenance of the building and not an alteration, especially if the pitch of the roof was not altered, as it was just the installation of new materials to directly replace old material. The disputes about the borderline between alterations and repair and maintenance gave rise to a number of VAT tribunal and court cases over the years. As a result of these the general guidance from the courts was that if the old fabric was not ‘in need of repair’ (that is, if the roof that was being replaced was still serviceable), the replacement could count as an alteration (and so be zero rated forVAT purposes), andwould not have to be viewed as ‘maintenance’ that would be subject toVAT. However, HMRC continued to challenge many projects involving listed buildings on the grounds that the zero rating was being incorrectly applied to works that it considered were works of maintenance rather than alterations. As a result of the uncertainty surrounding the borderline between alterations, repairs and maintenance, the 2012 budget withdrew this zero ratingwith effect from1 October 2012. This meant that any new building alterations undertaken on listed buildings became subject to 20 per cent VAT after that date. HMRC sought to justify this change by stating that it had been a major source of confusion and taxpayer error, and that the changes would remove the need to try to distinguish between alteration and repair and maintenance. It would also remove the VAT-saving incentive to alter, rather than repair, listed buildings. In order to avoid taxpayers suffering unexpected additional VAT on projects that were already under way, transitional measures were introduced tomaintain the zero rating on works that were in progress, or which had been approved to commence, before the date of the budget. Any approved alteration work which was under way at the time of the budget (21 March 2012) can benefit from these transitional measures, which will maintain the zero rating until 30 September 2015. In order to benefit from these transitional measures, the work must have been subject to a written contract that had been entered into prior to 21 March, or listed building consent must have been applied for prior to that date. This change inVAT liability causedmuch consternation at the time of the budget. As a result of pressure from the church community, the chancellor has increased the grants available to fund the additionalVAT burden that will apply on buildingwork undertaken after 1 October 2012 to listed churches, if the transitional reliefs do not apply.TheseVAT refund grants are administered by the Listed Places of Worship Refund Scheme (www.lpwscheme.org.uk).These grants relate only to listed churches, so owners of other types of listed buildings will suffer an additional burden of 20 per centVAT on alteration work carried out after 1 October if the transitional reliefs do not apply. There are no proposals to change the zero rating that applies to the construction of new residential and charitable buildings, or the construction of new ‘selfcontained annexes’ for charities.There is also a zero rating for the ‘substantial reconstruction’ of a listed building (for charitable or residential use), but this applies only where the only parts remaining prior to the reconstruction are the external walls. Charities or owners who are planning new building work are advised to seekVAT advice in advance to see if anyVAT reliefs are applicable. John H Barnes isVAT director of Baker Tilly Tax and Accounting (johnh.barnes@ bakertilly.co.uk). While every effort has been made to ensure the article’s accuracy, the information contained may not be comprehensive and recipients should not act upon it without seeking professional advice.
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