HM Revenue and Customs Brief 49/10
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VAT: proposals to simplify the 'change in use' provisions1
Issued 6 December 2010
This Brief announces a four week consultation period to
consider proposals to simplify the ‘change in use’ provisions
(Paragraphs 35 to 37 of Part 2 of Schedule 10 to the Value Added Tax
From the date of implementation, the legislation will no
longer have two adjustment mechanisms (each with its own rules on how
to calculate and apply a tax charge) to apply to the two sets of
circumstances where a ‘change in use’ occurs.
Instead, there will be a single adjustment mechanism to be
applied in all circumstances. It will be based on the:
- amount of VAT that would have been chargeable on the
original supply (or supplies) had the building in question not been
eligible for the zero rate
- proportion of the building that is affected by the change
- number of complete years that the building has been used
solely for a qualifying purpose prior to the change in use
What is the purpose of the 'change in use' provisions?
New buildings that are intended to be used solely for a
relevant residential or relevant charitable purpose (a ’qualifying
purpose’) are relieved of VAT on their construction or acquisition. A
building that does qualify for that relief is expected to be used
solely for that qualifying purpose for a period of, at least, ten years
following completion of the building.
If the building ceases to be used solely for that ‘qualifying
purpose’ within that ten year period or if that use decreases, the
‘change in use’ provisions allow HM Revenue & Customs (HMRC) to
‘claw back’ some or all of the original relief.
Examples of how the current provisions work and how the
proposed simplified provisions will work can be found at Annex
Why do we want to make this change?
The current provisions are complex and, as can be seen from
the examples at Annex
A, produce uneven tax consequences. A change in use in one
set of circumstances can produce a different tax charge to the one
produced by a different set of circumstances even though, overall, the
same percentage of the building continues to be used for a relevant use.
The new provisions will produce similar tax charges where use changes
to a similar degree, regardless of the circumstances in which the
change in use comes about.
A copy of the draft legislation can be found at Annex
Who will be affected by this change?
This change will only affect buildings that cease to be used
for a qualifying purpose after the implementation date or whose use for
a qualifying purpose decreases after that date.
Charities are most likely to be affected by this change but owners of
buildings used for a relevant residential purpose, such as care homes
or old people’s homes, may also be affected.
A copy of the proposed draft legislation is attached. HMRC
will be grateful for any comments on the legislation and their
proposal. Please email any comments or observations to Stephen
Lumby by 3 January 2011.
Examples (based on a standard VAT rate of 20
per cent) of how the current 'change in use' provisions work and how
the proposed simplified provisions will impact
A £5 million new zero-rated building, consisting of five
floors, was occupied by a charity for its own use. During the first
five years it was used by them wholly for its non-business activities.
After five years it decides to change how it uses 20 per cent
of the building.
The VAT consequences under current legislation will vary
depending on the circumstances.
Used by that charity for business purposes
If one floor of the building is put to a business use by the
charity, then a one-off self-supply charge of VAT of £100,000 will be
This has been calculated under the current provisions as
The value of the original zero-rated supply (£5 million)
multiplied by the part of the building that has ceased to be used for a
qualifying purpose (20 per cent) multiplied by the remaining years left
in the ten year period after the change (5 or 50 per cent) multiplied
by the standard rate of VAT (20 per cent).
That is (£5m × 20% × 50% × 20%) = £100,000 VAT.
NB The charity can also recover
the VAT charged, provided the business activity carried out in this
area is fully taxable.
Impact of proposed change -
none - charge would be calculated on the same basis as at present,
resulting in a one-off self-supply charge of £100,000 VAT.
Rented to another charity for its non-business activities
Providing the rental to the other charity is non-business and
the charity tenant uses the part rented to them solely for a relevant
charitable use, then there is no change in use because the property is
still used wholly for a non-business purpose. The owner of the building
does not suffer a VAT cost.
Rented to a tenant who uses it for business purposes
If the property is let for five years to a tenant (including
another charity) who does not use that part solely for a relevant
charitable use, a change in use charge arises.
The charge is calculated by reference to any premium and rent
Assuming a £200,000 premium, and an annual rent of £60,000,
the change of use charge is £52,000 in the first year and £12,000 per
annum in successive years (that is 20 per cent of £60,000 per annum)
for a total of five years.
In total, the cost will be £100,000 VAT.
Different tax results are likely depending upon the length of
the lease, whether there is a premium and the value of the rent.
Impact of proposed change - the
annual charge based on rent charged is replaced by one-off liability
based on 20 per cent overall changed use of the building, that is £5m ×
20% × 50% × 20% = £100,000 VAT.
NB The charity can recover the
VAT charged if it opts to tax the rent charged and that option is not
Draft Statutory Instrument 2010 - The Value Added Tax (Buildings and
Land) Order 2011 (PDF 34K)
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Article Published/Sorted/Amended on Scopulus 2010-12-08 14:24:53 in Tax Articles