Another zero rate bites the dust…

August 29, 2012 at 16:08

With fewer distractions now the Olympics have finished, we’ve been reflecting on the charity finance-related policy developments of the year so far – many of which were introduced or reiterated in March’s budget.  The rather unpopular budget finally limped onto the statute book last month, following a number of u-turns and minus any reference to the ‘charity tax’ following widespread objections from the sector.

One area where lobbying efforts were much less successful, however, was on the Government’s proposal to remove the VAT zero-rating for alterations to listed buildings.  The measure will result in significant additional costs to charities owning or using listed buildings, which will have a negative, knock-on impact on beneficiaries and, more widely, the use of heritage assets in the UK. However we also objected to the policy on the grounds that it is poorly and unfairly targeted, given that it will hit a huge swathe of individuals and organisations (including charities) yet only achieve its policy objective on very few.

Government indicated that the measure was intended to crack down on owners of listed buildings making changes – which have nothing to do with heritage preservation – for their own personal benefit, or making alterations when it’s actually repairs that are needed, VAT free.  While few would object to this, we and others questioned how often it actually happens – are there lots of millionaires out there installing a steam room on the side of a crumbling wall to save the VAT on re-plastering?  The Heritage Alliance, who actively campaigned against the measure, submitted an FOI request  which revealed, somewhat unsettlingly, that the policy’s underlying justification was based on a total of only 105 cases.

The measure was also justified on the grounds of simplification, as repairs to alterations are charged at the standard rate of VAT.  In principle, of course it would be easier and more logical to have a flat rate for both – but the reality is policy doesn’t work like that, especially not tax policy.  ‘Simplification’ shouldn’t be an end in itself, particularly if it is going to cost millions more per year, impact on UK heritage and result in more work (which for charities means more fundraising and planning).

Some have suggested that the move was really a cheap swipe intended to be viewed as targeting the wealthy owners of country mansions, to offset any perceived bias to the rich with the removal of the top tax bracket.  (This was certainly one of the reasons for the cap on tax reliefs for higher rate payers).  However, as we’ve said before, this type of last-minute populist policy making does not allow for due consideration to be given to the full implications of any changes.  In this case charities and the heritage sector have ended up the unintended victims.

Nonetheless, while there was no full u-turn or charity exemption (as we pushed for in our consultation response) a number of fairly substantial concessions were made.  Firstly, and perhaps most importantly, the Government announced fairly early on that an additional £30m would be made available for the DCMS Listed Places of Worship Grant Scheme, to ensure applicants receive 100% of their VAT back.  Great news for the churches and others who embarked on a highly effective and united lobbying project, but you can’t help but feel it’s a case of appeasing those with the loudest voice.  Plus it’s unfair to single out one group when HMRC’s reason for not granting a charity exemption was that it was ‘hard to justify preferential treatment… whether or not a charity is involved’ – i.e. you can’t single out charities.

Since then more generous transitional arrangements have also been announced, extending the transition period to 30 September 2015 (from 2013) and allowing projects to continue to benefit from the zero rate if listed building consent (or equivalent) had been applied for before budget day (21 March 2012).  All these changes are good but don’t detract from the fact the measure will still bring huge costs and in all likelihood stop many much-needed projects from going ahead.

So what next?  Heritage Alliance has said it’s important to track the impact – to see whether valuable projects are shelved and heritage assets do suffer.  So we would encourage charities with listed buildings to consider and note what difference the VAT change makes over time.  The sad fact is that even if it transpires that the policy is a disaster there will be no scope for a rethink – the EU doesn’t like zero ratings so there is slim to none chance of prising this one back.  Which is a real shame given the damaging effect this will have on charities, their beneficiaries and the UK heritage sector.