VAT – The Curse of the Building Conservation Classes

Mike Payne

VAT issues impacting historic buildings have been addressed in previous editions of The Building Conservation Directory but in this edition Mike Payne covers not only the scope of the tax but also, with examples, how the regulations are applied, citing VAT tribunal cases.

THE LAW – ZERO RATE VAT Act 1994, Schedule 8, Group 6

The ‘zero rate’ applies to ‘protected’ buildings – that is to say buildings which are listed or scheduled and which are in residential or charitable use (see definitions below) – for the following:

Item 1: The first grant by a person substantially reconstructing a protected building of a major interest in, or in any part of the building or its site – for example, the sale of a house which is listed and has been substantially rebuilt.

Item 2: The supply, in the course of an approved alteration of a protected building of any services other than the services of an architect, surveyor or any person acting as consultant or in a supervisory capacity – for example, the services of building contactors and other trades where these relate to the alteration of a house which is listed.

Item 3: The supply of building materials to a person to whom the supplier is supplying services within Item 2 of this group which include the incorporation of the materials into the building (or its site) in question – for example, the materials used by a building contractor for the alteration of a house which is listed.


1. Protected Buildings

• a listed building as defined by the relevant Planning (Listed Buildings and Conservation Areas) Act 1990, and its equivalents in Northern Ireland and Scotland

• a scheduled monument within the relevant Acts and which satisfies the following conditions: (i) it is designed to remain or become a dwelling or number of dwellings. It must be self contained with no internal access to any other dwelling, and separate disposal is not prohibited by any provisions (ii) it is intended for use solely for a relevant residential purpose or a relevant charitable purpose after the reconstruction or alteration.


Two cases which provide assistance in this definition are cited below. In MKM Builders v The Commissioners, HM Customs and Excise (CEC) the tribunal ruled that zero rating did not apply to the conversion of a barn into a music room in the grounds of a listed dwelling because the converted building could not be occupied as a separate unit of residential accommodation, but only as an adjunct to the house in which grounds it stood.

The case of Zielinski Baker & Partners v CEC went all the way to the House of Lords. Despite conflicting rulings in the lower courts, the Lords held that the construction of a swimming pool and the conversion of an outbuilding into changing and games rooms did not qualify for zero rating because it was not an extension, nor did it form an integral part of the listed building. Thus the outbuilding could not form part of the main building, and the construction services were not zero rated.

2. Major Interest

The freehold sale or the granting of a lease over 21 years.

3. Curtilage

Since the law refers to a building or its site, the definition of what constitutes a site or curtilage is all-important. This is defined as a reasonable amount of land surrounding a building, which may include other buildings.

4. Substantial Reconstruction

As provided for in the VAT Act 1994 zero rating applies to the first grant of a major interest by a person substantially reconstructing a protected building. In the case of a dwelling, zero rating will not apply where the grantee is not entitled to reside in the building throughout the year, or where accommodation cannot lawfully be occupied as a permanent residence.

Substantial reconstruction is defined as major work to the fabric of the building, including replacement of much of the internal or external structure. In addition one or both of the following conditions must be met: (i) at least 60 per cent of the cost of the reconstruction work would qualify for zero rating as approved alterations (see below) and/or (ii) the reconstructed building incorporates no more of the original building before reconstruction began than the external walls.

The significance of zero rating is that the developer will be able to recover the VAT incurred on all associated costs including building materials and services. If zero rating does not apply the supply will be exempt, and the developer will suffer irrecoverable VAT.


In D Barraclough v CEC the tribunal dismissed the appeal for zero rating as a substantial reconstruction, because it considered the work to be a minor enlargement of a building and modernisation of its interior. In A D J Lee v CEC, again the tribunal dismissed the appeal for zero rate because the restoration did not qualify as a substantial reconstruction, despite the restoration costs exceeding £900,000.

This demonstrates that the value of the work is not conclusive in establishing zero rating. The author has acted for a significant number of clients claiming zero rating for substantial reconstruction. In one particular case, the HMC&E agreed with the submission that the reconstruction of a protected building into flats qualified for zero rating, because previously the use as a secure school for disturbed children had resulted in extensive fire-damage and, in the course of making the flats and apartments, the internal structure was drastically gutted, effectively resulting in a complete new internal profile.

5. Approved Alterations

The supply in the course of an approved alteration may be zero rated subject to the following:

• the property must be used for a qualifying purpose as defined above
• the building must be listed as defined in 1 above
• listed building consent must be obtained from the appropriate planning authority (listed building consent is required for work on a listed building which would affect its character as a protected building)
• the work must constitute structural alterations, and must not be a work of repairs, maintenance or replacement (HMC&E regard an alteration to constitute a meaningful change to the fabric of the building such as to its walls, roofs, floors or stairs, for example).

The definition of what constitutes a zero rated approved alteration is open to much debate. Where the work may be considered to be partly qualifying and partly not, it is important to note that zero rating may be agreed if it is possible to argue that the repair or maintenance element (redecoration for example) was necessary because of qualifying approved alterations.

It is important to note that even if an approved alteration has been made, if listed building consent has not been obtained, zero rating will not apply.


The different rulings relating to roofs offer an insight into what constitutes a zero rated approved alteration.

Unsuccessful In Wind Flower Housing Association v CEC, listed building consent had been obtained for improving a roof structure on a Grade II listed building. Although the work had involved the raising of the roof plane, it could not be zero rated because raising it was an integral part of wider work of repair and maintenance.

Successful In Dodson Bros v CEC, the tribunal agreed that re-thatching two listed buildings qualified for zero rating, because straw had been replaced by reeds altering the appearance of the roofs, and the roofs had not been in need of specific repair.

In CN Evans v CEC, again the tribunal agreed zero rating applied to the replacement of a slate roof by a tiled roof because the work intrinsically altered the appearance of the roof. The writer has successfully obtained zero rating for a client in a supply of alteration to a roof. The building in question was a former warehouse which was being converted into apartments. The building had continually suffered leaks and other problems with the roof, which was replaced. In this case it was successfully argued that the work was not of repair or maintenance because the roof was not performing the function for which it had been designed due to the inherent design faults, and thus the work was zero rated as an approved alteration.

This demonstrates the value of considering all the reasons for the work, to identify and establish a case for zero rating.


As previously established, any work of a repair or maintenance nature is standard rated. However, for listed buildings which are places of worship a grant scheme was introduced with effect from 4 December 2001.

This enables grant aid to reduce the VAT incurred from 17.5 per cent to five per cent on repairs and maintenance on such buildings. In the Chancellor’s Budget of March 2004, with effect from 1 April 2004, it was announced that listed places of worship will be able to claim all the VAT paid on eligible works. The VAT law relating to ‘protected buildings’ is complex and open to differing interpretations.

As demonstrated in the cases sited in this article, appeals to the courts have been successful in obtaining zero rating, despite HM C&E arguments to the contrary. Because the VAT impact on property has considerable value, it is imperative that all aspects are examined to ensure the most cost effective treatment.


The Building Conservation Directory, 2005


MIKE PAYNE has been a VAT practitioner for 32 years. An HM C&E senior officer with 17 years experience, he joined a national accountancy practice as a director, advising on VAT issues, and he now runs his own VAT consultancy business. His expertise on protected building issues includes advising the Association of Preservation Trusts. For further information, please e-mail mpayne@

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