27 Feb Why developing a listed building costs you 20% more in 2013.
For many years, construction works for alterations to listed buildings have benefited from a 0% VAT rate – an encouragement to homeowners to undertake significant restorations and to prolong the active life of historic buildings.
But all that has changed.
In this INSIGHT paper, Dominic Parker, director of the Janine Stone Private Office, discusses the impact and implications of this significant cost increase for many homeowners and developers in the prime markets.
What does HMRC mean by “alterations”?
HMRC’s definition of alteration is critical in understanding this, although it is still, to an extent, subjective.
Alterations to listed buildings involve the changing of its fabric (e.g. its walls, roof, internal surfaces, floors, stairs, windows, doors, plumbing and wiring) in a meaningful way, while repair and maintenance works are regarded as those tasks that are designed to minimise for as long as possible the need for, and the future scale and cost of, further attention to the fabric of the building. Such works have always been – and continue to be – subject to the standard rate for VAT (currently 20%).
Why the change?
During the Budget Statement in March 2012, the Exchequer announced the removal of this tax relief from 1 October 2012 on the grounds that it provides “an unfair tax advantage over other owners of non-listed buildings who do not receive any benefits for equivalent alterations”. Furthermore, the Chancellor explained, the change “removes a perverse incentive to change listed buildings rather than repair them”.
The Heritage Alliance, the largest coalition of heritage interests in England which represents over 90 major national and regional non-governmental organizations and which is supported by over five million members and thousands of local volunteer groups, challenged these statements in their formal response to the government letter of 14 May 2012,
“HMRC’s claims that “in the majority of cases the work undertaken is for extensions and other alteration work to private dwellings”. But this evidence is based on a sample of just 105 cases of listed building consent, where there are nearly 30,000 cases each year.
“Furthermore, HMRC’s response does not refer to the public benefit of listed buildings. In arguing that “it is hard to justify preferential treatment for altering a listed building over altering a non listed building”, HMRC still fails to understand that heritage protection operates in the public interest, requiring all alterations to be approved in order to protect their integrity. Listed buildings are different to non-listed buildings – their protected status is a recognition of their immense public value: financial, social, cultural and aesthetic.”
These arguments against the removal of the VAT exemption – or even a VAT reduction – have largely been ignored by the government, despite calls from significant numbers of individuals and organisations. The government’s reason for this may be more financial than anything else.
There are an estimated 350,000 listed dwellings as well as an estimated 35,000 – 50,000 listed buildings owned by businesses or charities for residential or charitable purposes. HMRC estimates that around 10,000 households and 1,000 businesses and charities may be affected each year by this VAT increase in a move that is likely to generate almost half a billion pounds for the Exchequer over the next 5 years.
Year Impact to the Exchequer
2012 – 13 +£35m
2013 – 14 +£85m
2014 – 15 +£95m
2015 – 16 +£110m
2016 – 17 +£125m
Mitigating the impact of this ruling
However, not all is doom and gloom. To mitigate the impact of this new ruling, the government announced that a transitional relief period will apply if evidence can be supplied that
listed building consent was applied for before 21 March 2012
a written contract with a builder was entered into before 21 March 2012 and that the works performed are included within the scope of the consent or contract
In these cases the zero-VAT rating will be maintained until 30 September 2015.
What if I want to buy and develop a listed building?
The transitional relief period will still apply, as long as the listed building consent was sought before 21 March 2012.
What if my building had consent, but I need to change the plans?
Again, the government has not been entirely dismissive of owners’ needs. If plans need to be changed because of a problem discovered in the course of the building works, then a new application will need to be submitted. In this case, if the works are minor changes (q.v.), then they will be granted the same VAT relief. However, if the new application extends or alters the scope of the pre-21 March 2012 application, they will not fall within the transitional relief.
Examples of what HMRC regards as a minor change:
During construction, excavations reveal an obstacle which necessitates the repositioning of an element within the building or a change in the shape of the building without increasing the original sized of the planned works.
During construction, it is discovered that a large window that was granted consent will make the wall unstable and so a fresh application is made replacing it with two smaller windows.
Examples of what HMRC does not regard as a minor change:
The addition of a first floor extension to the original plan for a single storey extension
An increase in the original area of a planned extension
The addition of a new feature which is additional to, rather than a replacement of a feature in the original plan.
The option of reducing VAT to only 5%
If, however, you own a residential dwelling that can be shown to have been unoccupied for the two years before works begin, then VAT on the cost of works is reduced to 5%. Non-occupation must be proven by official records, such as those obtained from the electoral roll or council tax records, but this provides homeowners with an opportunity to reduce their exposure to VAT for listed building alterations if they can afford to leave the property empty for a two year period beforehand.
The perspective from the Janine Stone Private Office
Many UK residents, both British and international, harbour the ambition to live in a beautiful home that is part of this isle’s heritage. Whether graced with a blue plaque or not, each of these properties reveals fascinating insights into the history of the period in which it was built.
However, architects of yesteryear could as much anticipate our contemporary lifestyles as we can predict those two hundred years from now. As such, alterations to these houses are vital not only to accommodate the lifestyles of 21st century families but also to protect and preserve these important buildings that are the touchstones of Britain’s cultural, social and architectural history.
Simon Thurley, the chief executive of English Heritage, has repeatedly expressed a view that listed buildings need to have an economic vitality and support their own existence (i.e. be suited to modern living). However, the financial crisis and the removal of the VAT exemption have already had an adverse impact on these buildings as developers and homeowners have struggled to manage the increased costs inherent in making such adaptations and alterations. As homeowners and developers continue to struggle to source development financing, more listed properties will fall into disrepair and more important buildings will be lost to the nation.
Thus, along with many other heritage and architectural organisations, we are disappointed that the government has removed the VAT exemption and so discouraged many existing (and potential) homeowners and developers from adapting these properties. We therefore continue to support government proposals on intelligent tax incentives that might help maintain and improve listed buildings for future generations to enjoy.
At the same time, we would encourage owners of portfolios of properties to consider whether they can afford to leave any of their listed properties unoccupied for a period of two years before alterations begin in order to benefit from the reduce rate of 5% VAT.
Finally, it is our opinion that it is now more important than ever to engage with an experienced architect before beginning work on – or even acquiring – a listed property. An experienced architect will understand how to work with traditional materials and adapt homes in the most appropriate manner; they will also have an in depth understanding and political mindset sufficient to navigate the often byzantine politics of securing all the necessary consents. Ultimately, the right architect will ensure that homeowners and developers are following the most appropriate and cost effective path to creating a home for now and for the future from our heritage.
For further information, please contact:
Dominic Parker, Director of the Private Office
Tel: +44 (0)20 7627 5300
 In a subsequent open letter published in the Times on 14 June 2012, a grouping of senior executives in prominent heritage organisations and building companies, wrote,
“Since the Budget, ministers have repeatedly told MPs and the public that this VAT increase was about stopping millionaires installing swimming pools tax free. When we looked at a sample of 12,049 recent applications for listed building consent from across the UK, we found only 34 applications for swimming pools. According to the clear guidance from HMRC less than half of these had any chance of qualifying for the VAT relief.”
 VAT is reduced to 5% on any works of repair, maintenance (such as redecoration), or improvement (such as extensions) carried out to the fabric of the building. However, the installation of goods that are not building materials (such as carpets or fitted bedroom furniture) must be standard rated at 20%.
 HMRC allows for owners of properties to install a “guardian” in order to deter squatters and vandals. In this case, the guardian may pay a low rent on terms that fall short of a formal tenancy or they may be paid to occupy the property.