Weekly tax brief
Do HMRC’s VAT rules on listed building works stand up to scrutiny?
05 October 2021
A recent First-tier Tax Tribunal appeal, concerning the redevelopment of an important historic building has highlighted the limitations of a VAT relief to encourage residential conversions of protected buildings.
The Royal Star and Garter Home is a Grade 2 listed building situated on Richmond Hill. After using the building for over 90 years as a nursing facility for injured members of the armed forces, its owners moved on to new premises and sold the building to a developer, which converted it into 86 flats, along with communal facilities for residents. The works, which cost £95 million to complete, left the walls and the roof substantially intact and the developer was also required by planning and listed building consent rules to retain certain internal features, including a marble staircase, the chimney stacks and the majority of its reinforced concrete floor slabs.
The developer took the view that its supplies of the finished flats qualified for VAT relief as a ‘substantial reconstruction of a protected building’. However, HMRC argued that the retention of the internal features of the building disqualified the onward sale of the new flats from the zero-rate. Instead, a VAT exempt sale of an existing building had taken place, effectively meaning that the developer was not entitled to recover VAT on the considerable costs of the conversion.
The tribunal has agreed with HMRC, deciding that the works did not qualify as a ‘substantial reconstruction’. VAT law limits the zero-rate to cases where the reconstructed listed building ‘incorporates no more of the original building than the external walls, together with other external features of architectural or historic interest’ - the tribunal rejected the developer’s arguments that this definition included the retention of internal features that are structurally necessary to preserve the external walls, such as the floor slabs and chimney stacks. It also found that retention of the marble staircase and entrance hall were too large to be disregarded as insignificant when applying the rules.
The VAT zero-rate for substantial reconstructions is all that remains of a wider VAT relief for alterations to listed buildings which was abolished in 2012. Given that this retained legislation is relatively untested in the courts, and the large amounts of money involved, the developer may well appeal again to the Upper Tribunal.
Whatever it decides, the case has shown up the limitations of this VAT relief, whose conditions seem out of step with the practical realities of a reconstruction of a historic property. Firstly, it seems illogical to have a law that aims to preserve the external walls of a listed building yet does not permit the retention of internal features that are vital to support those walls. It is also highly likely that most listed buildings suitable for conversion will have other internal features that are protected by planning rules and cannot be removed, thereby disqualifying the project from the VAT relief.
Finally, a recent report by the Royal Institute of British Architects (RIBA) has noted the damaging environmental effects of pulling down old buildings, both from the release of carbon during the demolition process and the amount of unrecyclable waste it generates. RIBA recommends that developers are strongly encouraged to repurpose existing buildings and suggested that VAT rules on construction services should be changed to favour refurbishment over demolition and rebuild.
At a time where demand for residential accommodation is high, and many listed buildings face an uncertain future because they can no longer be used for their original purpose, the government has an opportunity to kill two birds with one stone by creating realistic VAT rules to encourage their conversion into new homes.
The Royal Star and Garter Home is a Grade 2 listed building situated on Richmond Hill. After using the building for over 90 years as a nursing facility for injured members of the armed forces, its owners moved on to new premises and sold the building to a developer, which converted it into 86 flats, along with communal facilities for residents. The works, which cost £95 million to complete, left the walls and the roof substantially intact and the developer was also required by planning and listed building consent rules to retain certain internal features, including a marble staircase, the chimney stacks and the majority of its reinforced concrete floor slabs.
The developer took the view that its supplies of the finished flats qualified for VAT relief as a ‘substantial reconstruction of a protected building’. However, HMRC argued that the retention of the internal features of the building disqualified the onward sale of the new flats from the zero-rate. Instead, a VAT exempt sale of an existing building had taken place, effectively meaning that the developer was not entitled to recover VAT on the considerable costs of the conversion.
The tribunal has agreed with HMRC, deciding that the works did not qualify as a ‘substantial reconstruction’. VAT law limits the zero-rate to cases where the reconstructed listed building ‘incorporates no more of the original building than the external walls, together with other external features of architectural or historic interest’ - the tribunal rejected the developer’s arguments that this definition included the retention of internal features that are structurally necessary to preserve the external walls, such as the floor slabs and chimney stacks. It also found that retention of the marble staircase and entrance hall were too large to be disregarded as insignificant when applying the rules.
The VAT zero-rate for substantial reconstructions is all that remains of a wider VAT relief for alterations to listed buildings which was abolished in 2012. Given that this retained legislation is relatively untested in the courts, and the large amounts of money involved, the developer may well appeal again to the Upper Tribunal.
Whatever it decides, the case has shown up the limitations of this VAT relief, whose conditions seem out of step with the practical realities of a reconstruction of a historic property. Firstly, it seems illogical to have a law that aims to preserve the external walls of a listed building yet does not permit the retention of internal features that are vital to support those walls. It is also highly likely that most listed buildings suitable for conversion will have other internal features that are protected by planning rules and cannot be removed, thereby disqualifying the project from the VAT relief.
Finally, a recent report by the Royal Institute of British Architects (RIBA) has noted the damaging environmental effects of pulling down old buildings, both from the release of carbon during the demolition process and the amount of unrecyclable waste it generates. RIBA recommends that developers are strongly encouraged to repurpose existing buildings and suggested that VAT rules on construction services should be changed to favour refurbishment over demolition and rebuild.
At a time where demand for residential accommodation is high, and many listed buildings face an uncertain future because they can no longer be used for their original purpose, the government has an opportunity to kill two birds with one stone by creating realistic VAT rules to encourage their conversion into new homes.
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