VAT Policy for historic buildings
Due to its length, this article is in two parts. You can see part 2 here.
This article was created by The Institute of Historic Building Conservation (IHBC). It was written by Bob Kindred MBE BA IHBC MRTPI and published in May 2014. You can see the original on the IHBC website.
It was originally published with an annex: Tax Relief for Heritage: Lessons from abroad.
- VAT introduced in 1973 and payable on repairs to all buildings has been a tax disincentive to the appropriate repair and timely maintenance of historic building and encouraged alteration (zero rated) at the expense of retaining historic fabric.
- The additional imposition VAT at the full rate on alterations in 2012 has placed a significant additional burden on owners of listed buildings who were already acting in the national interest as involuntary custodians of heritage.
- VAT on both repairs and alterations diminishes the economic viability of heritage projects particularly cases of Heritage-at-Risk, which are a priority of government heritage policy to resolve.
- VAT on both repairs and alterations has a suppressive effect on economic activity and has resulted in consequential loss of capacity especially among specialist, SMEs essential for the appropriate care of historic buildings and has a deleterious impact on initiatives to revive or promote enterprise, craft skills and apprenticeships.
- The Government's stated protestations that the commonality European Union taxation policies is a constraint from the application of varying rates of VAT is not supported by EU documentation.
- Concessions made by the Government for churches through the Listed Places of Worship Scheme comprised grants to offset VAT rather than the introduction of a concessionary rate.
- The current levels of VAT raise £600M annually but a reduction in VAT from 20% to 5% on housing repairs and maintenance is calculated would result (for the period 2015-2020) in a £15Bn boost to the economy, the creation of 95,000 new jobs and a carbon reduction of 240,000 tonnes of CO2 from thousands of homes.
- The reduction in the current level of VAT on repairs and general maintenance and alterations to historic buildings would be more than offset by a significant boost in economic activity providing a valuable stimulus to the economy in terms of employment, skills, National Insurance etc, and boost spending by contractors, manufacturers and suppliers in the economy at local level.
One of the most contentious aspects of managing and repairing historic buildings is the tax burden on owners and is an issue that has led to prolonged lobbying of the government by the heritage sector. Although Value Added Tax (VAT) was levied on repairs for many years, the decision by the government to tax alterations to listed buildings at 20% in 2012 while also removing a number of 'loopholes and anomalies' in the coverage of VAT proved controversial. The Treasury received nearly 1,500 responses (on the overall changes) to the consultation and profound concern about the impact was expressed within the heritage sector (and indeed outside), which persists. The IHBC's stance on this issue is set out in Section 7.
VAT was introduced on 1 April 1973 and has been payable on repairs to all buildings since. As a tax on consumption, VAT is the third largest source of government revenue after income tax and National Insurance. The taxation introduced by the VAT Act 1994, regulated approved alterations to a listed building as zero-rated .
The Government's policy position is that UK VAT law is based on European VAT law and it has limited discretion in amending the national VAT structure and rates. Further, it argues that under harmonization agreements for rates of VAT reached in October 1992 the UK cannot introduce any new zero rates of VAT but can continue charging any lower rates, including zero rates, which were in place on 1 January 1991.
- Additionally there is discretion to charge a reduced rate of VAT - between 5% and 15% - on a specified list of goods and services, one of which is the 'provision, construction, renovation and alteration of housing, as part of a social policy.' Consequently, the Government has stated that while it may charge a reduced rate of VAT on repair work for social housing, it cannot do so for historic buildings or churches .
- In October 1999 the EU agreed to amend VAT rules to give Member States the option, should they wish, to apply a reduced rate to certain 'labour-intensive services', to reduce unemployment. Included was the 'renovation and repairing of private dwellings, excluding materials which form a significant part of the value of the supply.' A number of countries took the opportunity to reduce the VAT rate on this supply - but not the UK, notwithstanding the fact that repairs to listed buildings could have been covered by this provision, provided that they were dwellings.
- Until 2012 if a building was listed, it might not have been necessary to pay the tax on approved alterations, however, in the 2012 Budget the government announced that VAT would be charged at 20% on all works of repair and alteration to listed buildings. Transitional arrangements were put in place to protect the tax rate applied to contracts entered into before 21 March 2012 but those contracts had to be completed by 30 September 2015 .
- If a listed building had never been previously used as a dwelling but was to become one following the work, or if it was already a dwelling but has not been lived in for two years prior to the works commencing, a lower VAT rate of 5% was to be applied. 
- The level of taxation affected by the proposals relating to alterations to listed buildings was estimated to be about £600 million based on data is taken from the Department for Communities and Local Government and local authority planning applications. About one fifth of this was estimated would become subject to the 5 percent reduced rate of VAT for residential conversions .
- A matter of great concern to IHBC is the adverse impact of VAT on Heritage-at-Risk (a Department of Culture Media and Sport (DCMS) and English Heritage priority). The VAT levied on this work significant impedes the viability of projects necessary to save them for future generations to enjoy. Timely repair demonstrates good conservation management and obviates the need for damaging and substantial reconstruction that inevitably follows from prolonged neglect and is the point when much of the special architectural and historic interest will be needlessly lost.
- A related concern is that VAT policy still retains the zero tax rate for substantial reconstructions of listed buildings if being rebuilt 'from a shell'. Although the precise meaning of 'shell' appears not to have yet been defined in the courts, there is a significant risk of deliberate and unauthorised alteration of listed buildings by removal of historic fabric to reduce substantial buildings to a shell purely for tax purposes .
The stated position of Her Majesty's Revenue and Customs (HMRC) is that:
'The repair and maintenance of a protected building is standard-rated, but the approved alteration of a protected building is zero-rated. Some alterations restore or enhance the unique character of a building or prolong its active life, but most work covered by the relief is extension work, which is unnecessary for heritage purposes. Alteration work on other types of building is standard-rated so owners of listed buildings receive a tax advantage over owners of other types of building.' 
This position ignores the principle that for historic buildings to continue to be fit for purpose, they must be capable of adaptation to appropriate and beneficial uses where repairs and alterations are often necessary and proceed hand-in-hand and should not be the subject of a taxation burden above and beyond the regulatory regime which applies through Listing.
As VAT is imposed at a fixed rate on the price of goods and services, it is commonly accepted that the tax is regressive, that is the burden of the tax lies more heavily on those with lower incomes, as the amount of tax paid is not based in any way on that person's ability to pay. Arguably this is an over-simplification in two respects: that a person's expenditure is, in fact, a measure of their ability to pay and that in this country, the tax base is such that VAT is not levied on a relatively large part of poorer households' budgets (for example, the zero-rating of food) .
Although a concession was made regarding churches through a grant scheme for Listed Places of Worship, offering some return where VAT has been paid it is unlikely to cover 100% of the VAT cost in most cases.
Promotion of the arguments
Since the introduction of VAT on historic building work, there has been lobbying on the issue but in 1999, a consortium of organisations led by the Joint Committee of the Amenity Societies commissioned Jeremy Eckstein Associates to report on the impact of VAT on listed building repairs and this was the subject of an article by John Sell in the IHBC's member journal Context.  
In December 2000 the Power of Place report coordinated by English Heritage proposed harmonizing 5% VAT rate on all building work, and other detailed and costed reports have been undertaken subsequently including one by the New Economics Foundation for the Princes Regeneration Trust in 2007  .
In July 2007 the RICS published research report assisted by the RICS Education Trust, which explored: income tax deductions and credits for the costs incurred in heritage work; income tax credits for the provision
of social housing in heritage buildings; property tax exemptions, abatements or freezes for heritage buildings; VAT concessions or rebates relating to conservation; taxation encouraging philanthropy through the establishment of heritage charities; and inheritance, gift and capital gains tax exemptions and concessions. 
The RICS report concluded that taxation policies have a key role to play in heritage management, providing incentives to owner-occupiers, investors and developers without requiring government expenditure, very much chiming-in with contemporary ideas about the size and role of the state.
An informative House of Commons Library Standard Note also sets out the efforts by MPs in the House of Commons on a number of occasions to raise the issue in relation to historic buildings without any perceptible impact on Government VAT policy. 
Long-standing disquiet about the impact of VAT on repairs to historic buildings, and campaigning for the percentage tax rate to be reduced or the works zero-rated has been superseded since 2012 by a greater, pervasive concern. This is that the Government, presented with the opportunity to offer assistance to historic building owners though the mechanism of a cut to the tax on repairs, has done precisely the opposite by 'equalising' the tax position – effectively levying the same full rate of tax on all listed building works, both repair and alterations at the 20% rate.
The Scottish Government in 2008 made some interesting observations on the sustainability benefits of equalisation of VAT at a lower level i.e. not necessarily following the main thrust of the arguments being advanced in England but equally valid. For example, equalisation would be likely to reduce the additional use of energy necessary to demolish existing buildings and construct new ones, not to mention the embodied energy in existing homes. A reduced rate of VAT would also be beneficial in improving energy efficiency and meeting emission targets. 
Other advantages of reducing the rate of VAT cited in Scotland included: help in bringing empty homes back into use; addressing the problem of sub-standard housing by encourage those (particularly on low-incomes) to improve their homes; encouraging regeneration - through development on brownfield land; and reducing the number of rogue builders - given that reducing the rate on renovations would lessen the commercial advantage that tax-avoiding builders would have. 
'With independence Scotland will have new powers over the economy to encourage our culture and creative sectors. For example, with new powers over taxation, we can explore a VAT reduction on repairs and maintenance work.'
'The Listed Places of Worship Scheme, which is administered by the Department of Culture, Media and Sport, provides grants in respect of VAT costs incurred for eligible repairs, maintenance and alterations to places of worship across the UK. The current Scottish Government proposes that a similar scheme should operate in an independent Scotland, and will consider extending the scheme to benefit the repair and maintenance of all listed buildings'.   
It was also stated that: 'Independence will enable the Scottish Parliament to explore a reduction in VAT on repairs and maintenance work to homes as part of wider taxation priorities'. This gives a clear indication of an intended policy direction on VAT and building condition and maintenance and including recognition of the historic buildings dimension. 
A concerted and sustained campaign by IHBC, the Heritage Alliance, SPAB and the RIBA; construction organisations such as the Federation of Master Builders, owner organisations including the Country Land and Business Association; the Historic Houses Association (HHA), and the Historic Towns Forum, the Countryside Alliance and the Cut-the-VAT Campaign Coalition, have all called on the government to reverse the 2012, decision without success. All these organisations have serious reservations about the revenue likely to be raised in relation to the disincentives for owners to properly manage and appropriately alter their properties and the significant fiscal, economic and sustainability benefits a cut would bring.   
Although organisations representing the professions, the third sector, construction and owners of large country houses (many of which are also businesses) all expressed deep concerns, the Institute notes that there is no constituency either within the sector or more widely, to articulate the anxieties of the majority of individual residential property owners of listed buildings who are struggling to meet their statutory obligations regarding repair and maintenance. 
While it might be argued that VAT-able alterations on individual properties would be levied only infrequently or as a one-off; this additional taxation by the Government on top of the onerous imposition of VAT on repairs is a cost that cannot be offset by for example commercial or charitable income or grants and is therefore a potentially significant personal financial burden.
The heritage sector has consistently lobbied on VAT, firstly for the reduction of VAT on repairs, and since 2012 for the reduction or relief from VAT on approved alterations to listed buildings. If this were achieved it would rationalise VAT in ways that would benefit jobs, the environment and the economy by encouraging essential maintenance and enhancement of historic buildings. Furthermore it would be a stimulus to the very large proportion of the parts of construction industry involved with refurbishment and by a stimulus to skilled employment. Failure to address this taxation anomaly may represent a significant missed opportunity by the Treasury.
In March 2014, the Cut the VAT Campaign Coalition published 'Am estimate of the effects of a reduction in the rate of VAT on housing renovation and repair work: 2015 to 2020', independent detailed research undertaken by Experian and co-funded by IHBC, the Federation of Master Builders, the Glass and Glazing Federation and the National Federation of Roofing Contractors. This research countered the anecdotal evidence issued intermittently by HMRC about the supposed impact of VAT and the problems associated with a reduction.  
The Experian Report demonstrates that a targeted reduction in VAT from 20% to 5% over the period 2015 to 2020 could provide a huge economic stimulus of more than £15.1Bn, create 42,050 extra full-time equivalent construction jobs and an additional 53,430 jobs in the wider economy, i.e. 95,480 extra jobs in the UK with up to 3,586 new construction jobs coming in Scotland; 1,475 in Wales and 416 in Northern Ireland.
In addition to jobs and growth, single cut in VAT on housing renovation and repair work could generate £1.008Bn on energy efficiency measures and help almost 91,700 homes benefit from retrofitting over the five years to 2020, helping to alleviate fuel poverty and reduce the cost of living but also help progress towards the UK's legally binding carbon reduction targets by reducing the emissions from our existing housing stock. There would be a potential saving of up to 237,128 tonnes of CO2 as these homes are retrofitted with loft and wall insulation, double glazing and energy efficient boilers.
Although these benefits would lead to a cumulative net loss of £6.6bn to the Treasury over five years, in 2015 alone the economic stimulus would create 31,950 extra full-time equivalent construction jobs; an additional 39,140 jobs in the wider economy; extra expenditure of around £145m on energy efficiency and potential saving of up to 36,358 tonnes of CO2. Critically, net losses to the Treasury of £921m might be expected once the revenue gains and losses from lower unemployment benefits, higher income tax and National Insurance are taken into account. 
This is one of a series of occasional IHBC Research Notes published by The Institute of Historic Building Conservation (IHBC). The Notes necessarily reflect knowledge and practice at the time they were developed, while the IHBC always welcomes new case examples, feedback and comment to [email protected] for future revisions and updates.
--Institute of Historic Building Conservation 08:17, 14 Jun 2016 (BST)
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