C O N T E X T 9 3 : M A R C H 2 0 0 6 One of the most irritating aspects of the law relating to historic buildings is the imposition of VAT on works to them. The position is far from straightforward; and it has been the subject of a great deal of litigation, both in VAT tribunals and the courts. It has recently been slightly clarified by the important decision of the House of Lords in Commissioners of Customs and Excise v Zielinski Baker and Partners. This article explores the background to the current rules and considers which buildings are eligible for relief. A second article in the next issue (Context 94, May 2006) will look at which categories of works are eligible, and outline the special rules relating to works to places of worship. Background Prior to 1984, all alterations to buildings were zerorated for VAT. The government then introduced VAT at standard rate on alterations, but retained the relief for listed buildings and scheduled monuments, in response to pressure from the heritage lobby. However, as with many tax ‘concessions’, the benefit is more apparent than real. In particular, following a 1988 decision of the European Court of Justice, the relief was significantly curtailed by the Finance Act 1989, so that it now applies only where the building is used after the works in question for residential or charitable purposes. The relevant legislation is contained in the VAT Act 1994, which contains (in Schedule 8) a number of ‘Groups’ of items that are zero-rated. Those that are principally relevant in the present context are Group 5 (construction of buildings etc) and Group 6 (protected buildings). This article relates to the Act as amended by statutory instruments 1995, Nos 280 and 283. Note that, as with almost all tax legislation, the VAT Acts apply throughout the UK. Further details can be obtained in a useful free leaflet Buildings and Construction (Notice 708), issued in July 2002 by HM Customs and Excise – the predecessor in respect of VAT matters to HM Revenue and Customs (HMRC), obtainable from local VAT offices and on the HMRC web-site (http://customs/hmrc.gov.uk). In addition to the statutory scheme, a further concession is operated by DCMS to enable the reclaim of the VAT payable on repairs to places of worship. Overview As a result of the provisions described above, the current position is now as follows: 1) The cost of ‘approved alterations’ to ‘protected buildings’ is zero-rated. 2) Other alterations to protected buildings are liable to tax at the standard rate (currently 17.5 per cent). 3) Tax paid on the cost of the repair and maintenance of listed places of worship can be recovered in full. 4) The repair and maintenance of other buildings (‘protected’ or otherwise) is liable to tax at standard rate. And 5) The disposal of a protected building after it has been substantially reconstructed is zero-rated. The effect of this is that, where works to a listed building are carried out in such a way that they do not affect its special character, no listed building consent is required, and their cost does not attract VAT relief. Where on the other hand the works do affect the character of the building, so that consent is required, VAT relief will be available. The relief in its present form thus arguably encourages works to be carried out in a less sensitive manner. As a result it has been the subject of much criticism: it was described by a previous secretary of state for the national heritage as ‘a wholly indefensible anomaly’. The Treasury has nevertheless stoutly resisted all moves for reform. However, the Court of Appeal (in Arbib (1995)) has held that it is appropriate to consider the purpose of the exemption – that is, that Parliament must have had in mind the onerous responsibilities imposed upon the owners of listed buildings. While the onus is on a taxpayer to show on the balance of probabilities that he or she comes within the zero-rating provisions, therefore, it is reasonable in borderline cases or where they are unclear to construe those provisions in favour of the taxpayer. On the other hand, the VAT Tribunal in the same dispute had dryly observed that ‘common sense and the law applicable to VAT are not well acquainted’. Protected buildings In the context of historic buildings, zero-rating applies by virtue of Group 6 to the following: •The supply of goods and services in connection with the carrying out of approved alterations to a protected building; and •The disposal of a protected building following its substantial reconstruction. It will be observed that the common feature of these is the concept of a ‘protected building’. It is therefore essential to understand at the outset what is meant by that term. Each Group contains a number of Notes which interpret the terms used in the Items. Note (1) to Group 6 defines a ‘protected building’ as follows: ‘...a building which is designed to remain as or become a dwelling or number of dwellings (as defined LEGAL BRIEFING Value added tax and the heritage: part 1 In the first of two articles on VAT, Charles Mynors outlines the rules on the imposition of VAT on works to historic buildings, and considers which buildings are eligible for relief.
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