VAT, construction and buildings: Anything to do with VAT and property always comes with a very strong health warning. This applies whether we’re talking about charity or non-charity property. In the case of charities, the rules are very detailed. While certain additional reliefs do apply when property is used for certain non-business use, they only apply when certain certificates are issued in a particular format and at the time.
Because of this, I’d always recommend that charities take advice from a VAT specialist when it comes to major property expenditure. The VAT and property rules are very specific and it’s tempting to assume that certain terminology should be given its everyday meaning, when in fact reliefs only apply as and when certain strict criteria apply. Making a mistake when it comes to charity expenditure might be a nuisance if it costs the charity a few hundred pounds in an unexpected VAT bill, but a five or six figure sum in unbudgetted VAT costs can have an enormous impact on a charities’ ability to function.
Terminology
One of the most important issues is the use of certain definitions within VAT. As VAT consultants, we tend to use a couple of shorthand terms, ie “commercial” and “non-commercial” when we talk about property. But in fact those terms don’t appear anywhere in the VAT legislation when it comes to property.
What the legislation does is to allow reliefs for certain types of property that is used for certain specific purposes.
There are three important terms as follows:
- Dwellings. This means our own homes, which can include houses, flats, houseboats and applies to dwellings that are either owed by the occupiers or rented from commercial landlords.
- Buildings used for “relevant residential purposes” (or “RRPs” for short). This term is often confused with dwellings, but has a different meaning. This applies to properties that are used as the main dwelling of a more than one resident, such as homes for the elderly, people with physical or mental disabilities and certain types of student accommodation. I tend to think of this term as referrring to any sort of group dwelling, whereas the term “dwelling” applies to homes that lived in by single families or individuals.
- Buildings used for “relevant charitable purposes” (or “RCPs” for short). This is the term used for properties that are used for certain non-commercial purposes by charities as well as commuity funded village halls etc. AS it only applies to non-commercial use, it does mean that charities will have to pay VAT on commerical use properties, in the same way as any other property owner. But bear in mind that a lot of properties funded by charities for non-business use will qualify for relief as RRP properties or even dwellings, so there is a lot of scope to qualify for the various VAT reliefs within the property legislation. And in fact many of the reliefs that are listed below apply to RRP properties, rather than RCP properties.
So when we use the terms “commercial” and “non-commercial”, the correct terminology we should use is “dwellings, RRPs and RCPs” and everything else. The important factor is essentially what the property is being used for, rather than how it’s funded or who owns the property. The definitions are explained fully in section 14 of VAT Notice 708: Buildings and Construction which is here http://tinyurl.com/ez77v on HMRC’s website. This is the “bible” for most information about the construction industry and is long and detailed, but it is extremely useful. It’s useful to use this in conjunction with Notice 701/7/02: VAT Reliefs for disabled people http://tinyurl.com/lnqxv which has specific information about zero-rating for construction work for the disabled.
The Reliefs
Generally, the same reliefs apply to the three categories mentioned above, although there are a few differences which I’ve mentioned in passing. Most of the information is contained in VAT Notice 708: Buildings and Construction which is here http://tinyurl.com/ez77v on HMRC’s website and I’ve listed the main section links.
- The construction of new dwellings, RRPs and RCPs is zero-rated. This also applies to the construction of certain annexes which are capable of functioning independently. This is probably teh most important of the reliefs – see VAT Notice 708, section 3.
- The sale or long lease of new dwellings, RRPs and RCPs by the “person constructing” is zero-rated – see VAT Notice 708, section 4
- The sale or long lease of non-residential properties converted to residential by the “person converting” is zero-rated – see VAT Notice 708, section 5
- Certain conversion work on non-residential buildings to dwellings or RRPs for housing associations is zero-rated – see VAT Notice 708, section 6
- The conversion of property into a different residential use or dwelling is liable to VAT at 5% – see VAT Notice 708, section 7.
- The renovation or alteration of an empty residential property to a different residential use or dwelling is liable to VAT at 5%. See VAT Notice 708 section 8.
- Approved alterations to listed dwellings, RRPs and RCPs can be zero-rated. See VAT Notice 708 section 9.. There is also a special relief to reduce the VAT cost of certain repairs to places of worship.
- The sale or long lease of substantially re-constructed listed dwellings, RRPs and RCPs by the “person re-constructing” the building can be zero-rated. See VAT Notice 708 section 10.
- The supply and installation of certain mobility aids for the elderly is liable to VAT at 5%. See VAT Notice 708 section 26.
- Certain construction involving the supply and installation of certain goods for the disabled is zero-rated. See VAT Notice 701/7/02: VAT Reliefs for disabled people http://tinyurl.com/lnqxv
- The option to tax does not apply to property that is used as dwellings, RRPs or RCPs. See VAT Notice 742a, Opting to tax land and buildings, section 3 http://tinyurl.com/3g32uz
- NB The VAT reliefs listed above relating to RRPs and RCPs is normally only available when the supplier has a certificate from the customer in advance confirming that the property will be used solely for use as an RCP/RRP. See VAT Notice 708 section 16. Certain minor non-charitable use by charities can be ignored.