01 January 2006

VAT and the Restoration of Listed Buildings: Reform May Be Under Way

Kenneth Mullen
Partner | UK

Value Added Tax (VAT) is a significant additional cost borne by those responsible for the preservation and conservation of British architectural heritage.  The general principle is that building works of all descriptions are subject to VAT at the standard rate of 17.5% unless either it can be zero-rated or it can be charged at a reduced rate of 5%. 

Zero-rating is not granted automatically, and the burden is on the owner of the building to show that the works are not liable to VAT at the standard rate.  If a listed building used for a residential or charitable purpose is “altered” (or substantially rebuilt), and appropriate planning consent has been granted, VAT on the alteration work is normally zero-rated, i.e. no VAT is charged.  If the building is restored, the cost of the restoration work is normally subject to VAT at the standard rate of 17.5%.  This means that the costs incurred in conducting essential sympathetic restoration on older buildings, e.g. country houses and industrial buildings, are subject to VAT at 17.5%.  If an older building is “altered”, e.g. an extension is built or a window is opened when one did not exist before, no VAT is charged on the costs of the alteration.

The reduced rate of 5% was introduced in May 2001.  It only applies in limited circumstances, e.g. where a single dwelling used for a residential or charitable purpose is renovated or altered after being empty for at least three years.

A special grant scheme for “listed places of worship” allows the owners of such buildings to reclaim the full amount of VAT paid on repair and maintenance works carried out on and after 1 April 2004.  Claims for repair and maintenance works carried out between 1 April 2001 and 31 March 2004 are eligible for a grant equal to the difference between the standard rate of 17.5% and the reduced rate of 5% on the costs of eligible repairs and maintenance.

For years, heritage preservation bodies have lobbied for VAT concessions to apply to the costs of restoring and maintaining older buildings.  They oppose the difference in the VAT treatment of the costs of restoring on the one hand and the costs of altering on the other.  They say that the current regime penalises individual householders and voluntary groups not registered for VAT who are thus unable to claim it back.

The campaign for a reduced rate of value added tax (VAT) on the cost of restoring older buildings has been marked with some success. In 1999, the EU decided to introduce, for a trial period, a reduction in the VAT rate for the renovation and repair of private dwellings in those Member States that so wished. France was among the first countries to take advantage of this, by announcing a 5.5 % VAT rate on this type of renovation work. The UK did not follow suit and the rate has remained 17.5% in this country (except in the Isle of Man).  The trial period expires on 31 December 2005.

Heritage bodies have continued to lobby the government and the European Institutions with two main objectives in mind.  One is the introduction of a favourable VAT regime for all heritage restoration work.  The other is the application of the favourable VAT regime to all buildings, not just to                 private dwellings.

In July 2003, the European Commission put forward a proposal for a Directive to amend the 6th VAT Directive.  The proposal seeks to harmonize reduced rates of VAT throughout the EU.  The intention is that the 25 Member States will agree a comprehensive list of goods and services to which reduced VAT rates may be applied. Under the current proposal, the “supply, construction, renovation, alteration, repair, maintenance and cleaning of housing” attract the reduced rate.  If adopted, the Directive would thus enable the UK to apply the reduced rate of 5% to the restoration, renovation and repair of older houses, whether listed or not.  The reference to “housing” in the proposed directive suggests that the restoration and renovation of industrial buildings would continue to attract VAT at the standard rate. 

The proposal has made slow progress through the EU institutions.  In September 2005, the British Presidency of the Council of the European Union applied pressure on the negotiations.  At the time of writing, only partial agreement has been achieved amongst the Member States.

Separately, the Department of Culture, Media and Sport has launched the Memorials Grant Scheme announced by the Chancellor in the March 2005 Budget. The refund scheme applies to memorials in the form of statues, monuments and similar constructions.  The scheme will return in grant aid the amount of VAT incurred in the construction, renovation and maintenance of memorials on or after 16th March 2005.  The scheme is aimed at charities, but religious groups that are exempted from registering as charities are also eligible.   The Memorials Grant Scheme is a temporary measure. It will operate until 2008 unless agreement is reached sooner at an EU level to apply a permanent reduced rate of VAT on the construction, renovation and maintenance of memorials. The scheme is being administered by DCMS for the whole of the United Kingdom.

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