Clause 95 - VAT: Residential Conversions and Renovations
Finance Bill
4:30 pm
Mr Edward Davey (Kingston and Surbiton, Liberal Democrat)
Thank you, Mr. O'Hara.
The Charities Tax Reform Group is concerned about quite a technical point, which relates to the definition of accommodation in the context of building work. The Value Added Tax Act 1994 distinguishes two types of residential accommodation: ``dwellings'' and buildings
``intended for use solely for a relevant residential purpose''—
or RRP. In the context of building work, a dwelling must be ``designed as a dwelling''. Most communal residential accommodation is not sufficiently self-contained to qualify, so it is treated as RRP accommodation instead.
That can cover a range of accommodation types that are significant for charities. I am sure that you are aware, Mr. O'Hara, that relevant residential accommodation may be for people with learning disabilities, or people whose carers are having a break. A range of charities run such accommodation, which could include accommodation for people who require personal care because of old age, past or present problems with alcohol dependency, drug abuse or mental disorder. It could also include hospices or even residential accommodation for educational purposes.
The current law, with VAT on building work at 17.5 per cent., does not discriminate between dwellings and buildings for a relevant residential purpose. The problem with clause 95 is that, in reducing the VAT rate from 17.5 to 5 per cent., it introduces discrimination against buildings with a relevant residential purpose. I can exemplify that rather technical point in several ways.
The clause proposes that the 5 per cent. VAT rate will apply to building works involving renovation of dwellings that have been empty for three years or more—that is excellent—conversions of non-dwellings, commercial or relevant residential purpose buildings into dwellings, conversions of dwellings into RRP buildings, and conversions of dwellings resulting in a different number of dwellings. All building works with accommodation in those categories will benefit from the VAT reduction, but most RRP buildings will not. As I said, some will benefit, if they are conversions in the direction of a relevant residential purpose, but others will not.
For example, the VAT rate will make it cheaper to convert commercial premises to dwellings than to RRP buildings, and cheaper to convert an empty RRP building to dwellings than to renovate it for RRP use. That is an oversight and a mistake, and I am flagging up a technical point to the Government, rather than criticising them. That failure could result in absurdities, as is demonstrated by the fact that conversions from offices to flats, and from flats to RRP use, will qualify for the 5 per cent. rate, but conversions directly from offices to RRP use will not; instead, they will be subject to VAT at 17.5 per cent.
The current law treats dwellings and RRP accommodation without discrimination. To maintain that state of affairs, we would need provision in tax law to ensure that the new 5 per cent. rate applied to renovations of RRP buildings that have been empty for three or more years, conversions of commercial and similar buildings for RRP use, and conversions of RRP buildings resulting in a different number of units.
The Minister will agree that it would be wrong to exclude such buildings from the preferential rate, because they are being used for charitable purposes and could be used for the social inclusion purposes that the Government have in their broader agenda. Therefore, the Government should re-examine the point again—or, ideally, clarify in Committee today that they are happy to take it as read that all RRP buildings will benefit from the reduced rate, and that they will tighten up the laws to clarify that in due course. The Minister may feel that she needs to write to me on the point, but if she assures me that she will be writing in a positive way, I will not press the Committee to divide on the clause.