VAT and Property

A legislative maze explored

Zaenia Rogers


  Blenheim Palace  

The VAT legislation that relates to property is renowned for its complexity. This is mainly because much of it is based
on VAT case law and relies on a ‘fair and reasonable’ apportionment basis which is, of course, subjective and could be disputed by HM Revenue & Customs (HMRC). This article aims to set out the basics and include some helpful hints to gain the best solution for both contractor and client.


The zero-rate of VAT applies to construction services (and building materials supplied with those services) provided in the course of ‘approved alterations’ to a ‘protected building’. A protected building itself is defined by HMRC as any building which is a listed building (within the meaning of the Planning (Listed Buildings and Conservation Areas) Act 1990) and for VAT purposes it must satisfy one of the following conditions:

a) It is designed to remain or become a dwelling or number of dwellings. This is satisfied where, in relation to each dwelling:

  • the dwelling consists of selfcontained living accommodation
  • there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling, and
  • the separate use or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provisions.

b) It is intended for use solely for a relevant residential or charitable purpose after the alterations. Following the House of Lords decision in the case of Zielinski Baker (2004), HMRC issued further guidance on ‘approved alterations’ to buildings and structures that share listing with the protected building. As a result ‘approved alterations’ which qualify for the zero-rating are those to:

  • the main dwelling
  • a garage, which meets the legal test for being part of a dwelling
  • any outbuilding which in its own right is designed to remain or become a dwelling.

Approved alterations are defined as those which are carried out under listed planning consent. HMRC regard a building
as being altered when its fabric, such as walls, roof, internal surfaces, floors, stairs, windows, doors, plumbing and
wiring are changed in a meaningful way. Works of repair and maintenance, or any incidental alteration resulting from
works of repair and maintenance, are standard rated, even if the work has been included in the listed planning consent.

Works that do not alter the fabric of the property do not qualify for the zero-rating. This includes civil engineering works,
works to driveways, paths and gardens. The following services are always standard rated:

  • the installation of goods that are not building materials, such as carpets or fitted bedroom furniture
  • the hire of goods (without an operator)
  • landscaping
  • the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors.

The key overriding principle for deciding whether works are of repair or alteration is to consider the reason why those works
have taken place, rather than considering each piece of work in complete isolation. HMRC’s own guidance states that it
will include: 'preparatory work before the alteration is carried out and remedial works required to make good the area
immediately surrounding the alteration. It must be carried out at the same time as the alteration is carried out'.


Although the zero rate applies for work which amounts to an approved alteration of a protected building, the balance of
services provided would normally fall to be standard rated. However, services provided in connection with the ‘qualifying conversion’ of a building may be charged at the reduced rate of VAT. A qualifying conversion is one which ends with a different number of residential dwellings than at the start.

As an example, if a protected barn is being converted to a dwelling then the majority of work to the fabric of the building will be zero rated as long as listed building consent has been granted. The remaining repair and renovation services will be liable to the five per cent reduced VAT rate rather than at the standard rate. In addition to this a DIY Housebuilder’s claim can then be submitted to HMRC to recoup the five per cent VAT charge as long as the owner intends to use the barn conversion as his dwelling. Strict rules need to be met but it is possible for a property conversion to be structured so that the owner incurs little or no VAT by the end of the project!

In the case of a protected building which is being converted to charitable use then the zero rating applies to works of approved alterations but the charity must issue a certificate of eligibility to the contractor before work commences in order for the zero rate to apply. The definition of‘charitable’ use is that of ‘non-business’ so charities must be careful that their actual use of the property is for at least 95 per cent non-business activity otherwise there are onerous VAT ramifications. Be aware that HMRC has recently amended the rules relating to charitable use of buildings and we are currently in a transitional period which started on 1 July 2009 and which ceases on 30 June 2010. After this period the precise interpretation of‘charitable use’ will be more stringent.

There are other scenarios where the reduced or zero rates will apply to property transactions, such as the reduced rate being charged on renovations and repairs to residential property that have been empty for two or more years. The sale of a substantially reconstructed property may also qualify for the zero rate of VAT, thus providing eligibility to VAT registration
for the owner and consequent recovery of VAT incurred on the costs of the work.


Listed Places of Worship Scheme
This grant scheme applies specifically for places of worship and it allows the difference between the VAT charged and the reduced rate (five per cent) to be recovered on works relating to specified repairs and maintenance. The scheme was introduced as existing VAT legislation does not allow the reduced rate to apply to places of worship and it therefore gives a refund to religious bodies to bring the standard VAT rate down to that of the reduced rate. The scheme acts as a grant fund and is not operated by HMRC but by the Department for Culture, Media & Sport. At present the scheme is authorised to run until 31 March 2011. Further details on the scheme and its application may be found at:

DIY Housebuilder’s Scheme
Some individuals having a new dwelling built, or indeed converting non-residential dwelling into a dwelling, may be in a position to recover the VAT incurred on building works back under a DIY claim. The process allows VAT to be claimed back on conversion costs directly from HMRC at the end of a project. There are strict time limits and other criteria to be adhered to, but the reclaim has benefited many individuals in the past. The aim of this scheme is to put the individual in the same position as if they had bought a brand new dwelling from a developer (on which no VAT would be charged). The key point to note is that HMRC will only ever refund correctly charged VAT, thus if your contractor charges 15 per cent where the supply benefitted from the reduced rate (five per cent), HMRC will only refund you the five per cent and the rest will be need to be recovered from the contractor who incorrectly charged it.


If a residential property has been created or renovated after the building has been empty for ten years or more, then it is possible that, when the property is sold (the freehold sale or a leasehold over 21 years), the building works will qualify to be treated as a zero rated supply. In this case the owner is entitled to register for VAT and then to recover the VAT incurred on the costs of the project.

VAT remains a maze of legislation and case law, but careful planning at the start will always help to alleviate tensions
regarding the VAT liability and make sure that budgets are clear from the start.



One recent case highlighted some interesting points which arise out of what, at first appeared to be the simplest of projects. The particular client owned a listed dwelling with various outbuildings on which major alterations and repairs works were being undertaken.

The architect initially asked The VAT Consultancy to get involved to ensure his client did not overpay on VAT, while the contractor was keen to ensure that he levied the correct amount of VAT.

Issues arising

1) Contractor’s liability – the VAT liability is that of the contractor and therefore careful negotiation is the key to ensuring agreement with your analysis.

2) HMRC will rarely provide a written opinion – despite the contractor writing to HMRC for approval of the works they were told that it was a self-assessed tax and that the Public Notice should be used to identify how the VAT liability applies. They therefore refused to give a clearance letter to the contractor.

3) Separate outbuildings issue – In this case the contractor had assumed that, as the outbuildings were also listed, the zero rate would apply to these buildings.
Although this was actually beneficial for the client (being charged zero rate where the standard rate was actually applicable), some contractors have clauses in their contracts allowing them to recover this VAT from the client at a later date. Therefore keeping silent when the contractor has the liability wrong is not always the best course of action!

4) Buying direct – The client was keen to order many of the specific items themselves. In this case they were about to order fireplaces direct from a supplier on a supply only basis and a VAT charge at the standard rate would have applied. The fireplace was an
approved alteration due to the fact it was being ‘opened up’ so the best advice was to make sure the main contractor ordered the fireplace so that he could supply and install it, thus being entitled to zero rate the entire charge.


Recommended Reading

HMRC Public Notice 708 – especially noting S.9.3.2 Alterations v Repairs (based on case law)


The Building Conservation Directory, 2009


ZAENIA ROGERS is a consultant at The VAT
, an independent VAT practice which provides VAT advice to professionals,
commercial and private clients on all VAT matters.

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