VAT and listed buildings

A recent VAT tribunal case, Calver Weir Restoration Project, clarified the definition of building for the purposes of zero rating approved alterations to listed buildings.

Despite the weir in question having listed building status the construction services supplied in the course of renovating the weir and creating a fish pass could not be zero rated because HMRC did not accept that it was a building as defined in the VAT Act.  

The VAT Tribunal considered relevant case law and decided that as the weir was not an ‘enclosure with walls and a roof’ nor ‘something built for occupation’ then it could not be classed as a building. They also dismissed the claim that the weir was in the curtilage of a listed building due to 1km distance between the main Calver Mill building and the weir.

It is important to note that obtaining listed building consent  for approved alterations only allows zero rating where the work is carried out on a structure which meets the definition of a building in the VAT Act.

Good news for Design & Build contracts

Following representations from the construction industry, housing associations and charities, HMRC has now accepted that design and build contracts for zero rated buildings can be treated as composite zero rated supplies.

HMRC was of the opinion that the design element could not be zero rated under EU law. However, technical analysis of UK law  identified crucial differences between UK legislation which allows zero rating of residential caravans but not their contents, and the construction of new zero rated buildings  but not the professional services of architects, surveyors etc. These differences allow design and build contracts for zero rated buildings such as new  dwellings, relevant residential buildings and relevant charitable buildings to be treated as one zero rated supply thus reducing VAT costs.

Enterprise Zones

In Budget 2011, the Government announced the introduction of new Enterprise Zones, which will have full discount on business rates, simplified planning rules, superfast broadband, and tax breaks for new businesses. Most of the locations have now been announced.

Whilst further details are awaited, the tax breaks will include enhanced capital allowances for manufacturing businesses, where the Zone is in an Assisted Area (for example, Tees Valley and North East). Watch this space.

SDLT for multiple purchases

Where land transactions are linked, it has been the case that the rate of SDLT to apply has been by reference to the total consideration. Thus (broadly) 3 houses bought together for a total of £750,000 would have attracted tax at 4%, rather than the 3% which would have applied to three separate purchases.

With effect from 19 July 2011, it is possible to make a claim for the tax rate to be the rate which would have applied had the transaction been a single transaction, the consideration for which is the average price of the properties involved. Thus, if a sale involved 10 dwellings for a total consideration of £1.8m, the rate of tax would be 3%, and not the 4% or 5% which would have applied in the past.

It should be emphasised that the relief only applies to dwellings; it must be claimed; and it is hedged round by anti-avoidance rules.

Accelerate tax relief for dilapidations costs

Where properties are leased it may be  possible to recognise dilapidations costs in financial statements before the expenditure is actually incurred. Broadly, provided that the costs of rectifying the dilapidations are quantified at the year end and returning the property to its former state is a requirement of the lease agreement, costs relating to the future expenses of reinstatement of the building can be provided in the accounts and tax relief brought forward.

Inheritance tax and property investments

Inheritance tax (IHT) can be a huge problem for property investors as, for large estates,  large amounts of inheritance tax can become payable. However, it is possible to mitigate this inheritance tax, in some circumstances, with careful planning between spouses or civil partners.

Planning ideas can range from very simple measures such as gifts of assets or cash to more complex, bespoke planning. The interaction of capital gains tax rules and IHT rules can also create some tax advantages where inter-spouse transfers are concerned. We would be happy to arrange a review of your affairs if IHT is a concern.

Faster tax relief for costs of building a property

When incurring capital expenditure on developing a building you do not usually obtain any tax relief for the costs, other than via capital allowances, until the property is sold. However, where the property is to be used in your trade, planning can be used which accelerates a tax deduction for part, all or sometimes more than the capital expenditure incurred. We can explain this planning in more detail if it is of relevance to you.

Time may be running out for capital allowances claims

At present, it is possible to make a claim for capital allowances on fixtures in a building many years after it was purchased or built. Such claims are often overlooked at the time of purchase, especially on second-hand buildings, yet it is still possible to make a claim, provided (broadly) that the fixture is still in place in the period of account for which the claim is made. The claims cannot be backdated to the original time of expenditure, but may be made from a current period.

However, HMRC is concerned that many such claims end up being allowed simply because they do not have the evidence to demonstrate that they are not allowable, with the effect that allowances may be overclaimed. In particular, a seller of a building will not necessarily know what the buyer is going to claim, and, conceptually at least, one may expect that the seller’s disposal value should match the purchaser’s expenditure on which he will claim. The whole situation is aggravated by the complexity of the rules for capital allowances on fixtures.

Accordingly, HMRC propose, from April 2012, to impose a time limit of perhaps only one year, although they may extend this to two years, during which period a buyer of a building, or someone incurring expenditure on an existing building, will have to make the claim for capital allowances. In the case of a building which is changing hands, the buyer and seller would have to jointly notify HMRC of the figures which each will use in its capital allowance computations.

The likely imposition of a time limit means that there is a small window of opportunity in which to make claims for historic expenditure , which may have been overlooked until now. A practical difficulty is that it will often be difficult to establish if the claims were made in the first place, given the time which may have elapsed in many cases.

This consultation closed on 31 August.

Allowances on solar panels and wind turbines set to reduce

The second consultation was regarding the capital allowances treatment of equipment qualifying for the feed-in tariff and renewable heat incentive such as wind turbines and solar PV panels. The changes arising from the consultation are to be brought in for expenditure incurred from 1 April 2012 for companies and from 6 April 2012 for unincorporated businesses and will likely reduce the rate at which allowances can be claimed to 8% per annum. In the meantime, the existing definitions of integral features and general plant remain relevant.

 Potential restriction on uses for property losses

A consultation regarding a possible restriction to the offset of rental income losses against other income, which is available to individuals in certain circumstances, ends this month. If carried through, this may affect certain investments (for example syndicated ‘BPRA’ investments), and it may therefore be appropriate to consider the timing of the investment.

There are detailed anti-avoidance rules restricting the ability of an individual to offset trading losses against other income of a tax year. These are aimed at preventing relief being given for ‘artificial’ losses. No such restrictions apply to rental income losses, although the only losses which may be relieved in such a case are those resulting from capital allowances (rental losses before capital allowances may not be offset against general income at all).

HMRC is concerned that certain marketed arrangements sell themselves on the ability to create capital allowances which are available for such offset. In the past, there were syndicated arrangements to take advantage of the 100% allowances given on commercial buildings in Enterprise Zones; now, there are investments which take advantage of ‘BPRA’ (Business Premises Renovation Allowances), which is a special relief given on the cost of bringing back into use, commercial property in disadvantaged areas.

HMRC is consulting on whether there is a case for restricting, or in certain circumstances, denying sideways loss relief. The result of  any such change in the rules would be that such losses could only be carried forward for relief against future profits from such sources. On the face of it, this would only mean a timing difference (ie tax relief given in a later year than under current rules), but tax rates could have fallen in the meantime, resulting in an actual disadvantage, not just timing. In addition, it is hard to see how such a change would fit with the policy behind the introduction of, and recent extension to, BPRA. It would seem inevitable that investment in ‘good’ projects would be harder to find.

The consultation period ended on 30 September 2011.