VAT services for heritage trust projects

Heritage projects are, by their very nature, unique and are primarily concerned with bringing back to life beautiful, cultural and historic buildings or extending the life of these buildings to ensure future generations can benefit from them.

In the last few years, at Chiene + Tait  we have advised on a railway goods shed, a Victorian gasworks, an orangery building and a medieval public house.  All projects were exceptional in their own way but all of them had an intention to revive and preserve important local buildings for the local community to enjoy and gain access to – often to aid telling the story of the building and its previous inhabitants.

There are obviously other professional advisers that a project of this nature needs, however the two key questions often asked at early stages of these projects is:

  • Will VAT be charged on the renovation works and at what rate? and
  • If VAT is charged, can the Trust recover it?

The answer to the first question is unfortunately fairly simple.  Up until 2012 approved renovations to listed buildings used for residential and charitable use qualified for zero rating which helped greatly in reducing the VAT costs on works for a lot of projects, particularly those where there was a strong heritage intention.  This zero rating provision is no longer available, however a 5% reduced rating is available for conversions to dwellings or works to residential property which has been empty for 2 or more years but this is the extent of the reliefs that are available.

The absence of VAT concessions for heritage property means that the only viable option to reduce the VAT “cost” on capital works and indeed ongoing costs is for the Trust to consider registering for VAT which brings with it increased administration and can also impact on the nature of the activities that take place within the renovated building.

Heritage Trust Network members can receive a free VAT consultation as part of their membership.

See Iain Masterton, our Director of VAT and Indirect Taxes, on commonly asked questions in a video produced for the 2020 Heritage Trust Network Conference below:

VAT registration

Given the lack of VAT concessions on works to heritage properties the only way a Trust can seek to reduce this VAT “cost” is to register for VAT and recover VAT through a VAT registration and the submission of VAT returns.

This is not as simple as it sounds and will depend on the extent to which the organisation makes “taxable supplies” in the building.  In the context of property, this would entail opting to tax the property and charging VAT on rents and licences and/or trading from the property via a shop, café or other retail facility.

The Trust’s ability to recover VAT on associated building works and professional costs will also depend on whether there are free of charge activities that take place in the building. For example, granting free of charge access to the general public is regarded as a “non-business” activity which would limit the Trust’s ability to recover VAT.

If the building has a mix of commercial activities (leases and licences, retail, café) and free of charge access, it is likely that there will be a partial restriction in the amount of VAT that would be allowable for recovery on the capital costs (and ongoing costs for that matter).

Often these questions arise at the grant application stage and Trusts have to provide a detailed summary of the VAT recovery position in order to be able to apply for a grant.  This is a good  time to speak to advisers as it is often a question asked by grant giving bodies. The implications for getting it wrong can be severe, and it gives the Trust an opportunity to know what other funding sources they need to consider to make up any VAT shortfall.

We tend to see Trusts adopting one of 3 operating models, however, as outlined above every project is unique.

We will look at these models in more detail but firstly it is worthwhile looking at the VAT registration process as problems can arise in obtaining a VAT registration at least initially for Trusts.

Problems with VAT Registration process

One of the problems a lot of Trusts encounter is that their VAT registration applications are initially rejected by HMRC.  This is often due to the fact that one of the questions asked in the VAT registration process is to confirm the estimated total value of taxable turnover in the organisation’s next 12 months.  In most cases this will be nil as the project will still be at a very early stage.  We recommend that Trusts pull together information at this early stage to be able to convince HMRC that it does have an intention to trade in the future.  The information that is useful is:

  • A business plan outlining sources of income once the building is complete;
  • Copies of invoices from professional advice, architect fees etc;
  • Proof of title to the property or leasehold interest;

If this information is available it should be sent to HMRC within 30 days of the rejection notice and HMRC generally will accept the VAT registration application at this stage.

VAT recovery – Possible Models

1. Commercial Lease/Licence Holder

Trusts can only reduce their VAT costs by becoming VAT registered and undertaking the types of activities normally associated with more commercial organisations such as charging rents and licences, retail and catering.  In some cases, this has been part of the Trust’s business plan anyway, as there is a recognition that the building will need to be self-sufficient going forward after Heritage Lottery Funding and other donations for the initial capital phase dry up.

One consequence of this is that in order to maximise VAT recovery our advice is to “opt to tax” the property which means that VAT would apply to rents and licences.  In areas where margins are tight the addition of a 20% charge can be a cause for concern, however many Trusts have adopted a tapered pricing structure which keeps rental prices lower for community groups and charities, and a more commercial rate for businesses, weddings, conferences etc.  This way, VAT is still charged, however there is less of a burden on the local community and it maximises VAT recovery at the start of the project.

2. Heritage Free Access Property

One problem area for Trusts which creates a VAT recovery problem is where the Trusts allows free of charge access to events and exhibits.  This is often a main aim of the Trust in the early days of a project – to open up a historic building, celebrate its character and allow it to be enjoyed by as many people as possible.  The provision of free access to a building is not completely fatal to VAT recovery on a project but if this is all that happens in the property it is likely that VAT registration will not be possible as there are no taxable supplies being made.

3. Mixed Heritage and Commercial Lease/Licence Holder

The most common type of activities we see are a mix of income generating activities such as retail and catering, leases and licences and free of charge heritage or educational access.  Where this takes place, some sort of restriction in VAT recovery would be required – potentially based on floor-space or visitor numbers or another “fair and reasonable” criteria.  The Trust should be able to obtain some VAT recovery provided VAT is charged on leases and licences.  VAT would be charge on retail and catering activities and usually in these types of property there will be a small shop or some retail or café income so VAT recovery can still be significant even if there are some free of charge “non business” activities taking place.

We recommend that Trust’s in this position seek advice from a VAT expert as HMRC will scrutinise the basis for the VAT recovery at some point so coming up with an accurate % at an early stage will prevent any surprises in the future.

A couple of recent European Court and UK VAT cases have suggested that such restrictions may not have to be as severe as previously thought, particularly where it can be argued that this non-business activity can be seen to boost other commercial activity such as a shop or a café.  We await further guidance from HMRC on their latest position following these cases but it would certainly assist heritage Trusts going forward.

Summary

It goes without saying that we would recommend any organisation planning a major capital property project to seek VAT advice at an early stage.  This is often a requirement of HLF funding in any event and an initial review of a project could confirm with reasonable accuracy the answer to the questions posed above.  After that, the other aspects of the project can be addressed safe in the knowledge that the VAT “cost” is known.

Contact us at vat@chiene.co.uk if you have any questions.