Cotswold Build Ltd: zero-rating, listed barn conversions and the option to tax
Cotswold Build Ltd is a VAT-registered building contractor. Three matters are live: (1) a new 200 sq m single-storey annexe for a village hall charity, physically attached to the existing hall, which the charity will use for its own activities 80% of the time and hire to local businesses for the other 20%; (2) the conversion of a disused listed stone barn, never used as a dwelling, into two dwellings, including new kitchens and a new access road; (3) the letting of a workshop to a registered charity that will use it wholly for non-business charitable purposes. The village hall charity has offered to sign whatever certificates are needed. Cotswold has never opted to tax any property. Its exempt rental income is about 4% of turnover and to date it has recovered all its input VAT.
1. Can the village hall annexe be zero-rated? Advise, including on the charity's offer to sign a certificate.
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Zero-rating for a charity requires the supply to be in the course of construction of a building intended for use solely for a relevant charitable purpose, with the certificate required by Sch 8 Group 5. Three obstacles:
- 'Solely'. HMRC accepts use of 90% or more as 'solely' (Notice 708). At 80/20 the annexe fails. Hiring to local businesses is a business use by the charity, not an incidental one, and 20% is far too much.
- Building or extension. The annexe is physically attached to the existing hall. If it is an extension or alteration of an existing building, zero-rating is not available at all - item 2 applies to a building. A self-contained structure with its own entrance and facilities can be a separate building, but attachment is a strong indicator against that.
- The certificate is not a magic wand. The charity can only certify what is true, and the contractor must not rely on a certificate it knows or suspects to be wrong. A certificate cannot convert a standard-rated supply into a zero-rated one, and Cotswold would bear the assessment plus penalties.
Conclusion: standard-rated at 20% on the whole contract.
Practical options to put to the charity: (a) reduce the commercial hiring to 10% or less and make it incidental; (b) redesign so the annexe is genuinely detached with separate services and access; (c) accept 20% and check whether the charity can recover it - a charity's non-business activity generally cannot, so this may be a real cost that should be priced into the contract. Get the decision in writing before work starts.
2. How should the barn conversion be rated, and what are the traps given that the barn is listed?
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The conversion of a non-residential building into one or more dwellings is reduced-rated at 5% (Sch 7A Group 7), together with the building materials supplied by Cotswold in the course of the conversion.
The listing trap. Many assume listed = zero-rated. The zero rate for approved alterations to protected buildings was withdrawn for most works from 1 October 2015. Listing does not give zero-rating here; 5% applies. The barn has never been a dwelling, so the conversion conditions are met - but if it had been used as a dwelling at any time, 5% would not apply and the works would be standard-rated.
Points of detail:
- The access road and groundworks within the curtilage, forming part of the conversion, are 5%.
- Fitted kitchens supplied and installed by Cotswold as part of the conversion are 5%. Free-standing appliances and goods not incorporated into the building (white goods bought in and resold) are standard-rated at 20% - split these out on the invoice.
- If Cotswold later sells a converted dwelling itself, its own supply is zero-rated as a first sale of a dwelling, but that is a separate supply from the conversion contract.
- Obtain listed building consent and evidence of the barn's prior use on file. If HMRC later disagrees on rate, Cotswold is liable for the shortfall, not the customer.
Adviser's point: issuing one invoice at 5% for the whole job, including appliances, is the classic error that turns a small mistake into a full assessment plus interest.
3. Advise on the workshop letting and on whether Cotswold should opt to tax, and identify the partial exemption consequence.
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Default position: letting is exempt (Sch 9 Group 1), so no output VAT and no recovery of input VAT on the workshop.
Would an option to tax help? Normally yes - 20% on the rent and recovery of the attributable input VAT. Here, no: the option is disapplied where the grant is of land that the landlord knows will be used by a charity for a non-business purpose. That is exactly this tenant. Opting would therefore achieve nothing: the rent stays exempt, the input VAT stays irrecoverable, and Cotswold would have an unnecessary option on its records affecting a future sale.
Partial exemption. Input VAT on the workshop works is attributable to exempt rental income:
- Cotswold's exempt input tax is likely small, and the de minimis test has two legs, both of which must be met: exempt input tax no more than £625 per month on average (£7,500 a year) and no more than 50% of total input tax.
- The 50% leg is comfortably met at 4% of turnover. The £7,500 leg is the one to watch: on a substantial refurbishment the attributable exempt input tax could easily exceed £7,500, and de minimis is lost entirely - not tapered.
- If de minimis is lost, use the standard method or a special method and consider whether the workshop costs can properly be attributed to taxable business rather than to the letting.
Recommendation: do not opt; record the charity's non-business use in writing; and monitor the £7,500 cap before committing to the workshop works.