Memorandum by HM Treasury (HIS 55)
INQUIRY INTO THE ROLE OF HISTORIC BUILDINGS
IN URBAN REGENERATION
Thank you for your letter of 1 February. The
Government welcomes the Urban Affairs Sub-Committee's inquiry
into the role of historic buildings in urban regeneration. The
Memorandum you have received from ODPM sets out the extent of
Government support in this area more fully than I can in this
letter.
In November 2002, the Chancellor of the Exchequer
reaffirmed the commitment that Government and the Treasury have
to urban regeneration in his speech to the Urban Summit. 50, 20
or even 10 years ago the idea that the Treasury would be interested
in issues like public space, the design quality of public procurement
in urban areas, devolution, regionalism and social exclusion would
be almost unthinkable. But we know that not only are these questions
vital to successful, economically vibrant cities but they are
at the heart of the agenda for social and economic progress, and
we are privileged to be associated with the challenge, led by
the Deputy Prime Minister, of creating sustainable communities
in our towns and cities.
VAT ON HISTORIC
BUILDINGS, LISTED
PLACES OF
WORSHIP AND
THE REDUCED
RATES REVIEW
The current VAT treatment of work on Historic
Buildings is partly the product of historical development, and
it may be helpful in explaining the Government's approach if I
set out the background. When VAT was introduced in 1973, zero-rating
applied to the construction, extension and alteration of all buildings.
In contrast, the repair or maintenance of existing buildings,
including listed buildings, was and has remained standard-rated
Because of difficulties in administering the
borderline between "repairs" and "alterations",
the relief for alterations was largely withdrawn in 1984 although,
in response to concerns raised by heritage bodies, the zero rate
for work "carried out in the course of an approved alteration"
to a listed building was retained. In 1989, following infraction
proceedings by the European Commission, the zero rate was restricted
further to exclude works to commercial buildings.
The current position, inherited by this Government,
is that zero-rating applies to the construction and sale of new
dwellings and communal residential and charitable buildings. Zero-rating
also applies to approved alterations to a listed building which
is a dwelling or communal residential or charitable building.
Long-standing formal agreements with our European partners allow
us to keep our zero rates as they currently stand, but do not
allow us to extend them or introduce new ones.
Although we cannot introduce new zero rates,
in common with other EU Member States, we can introduce a number
of reduced rates, but only on a prescribed list of goods and services
set out in Annex H of the EC Sixth VAT Directive and at a rate
of not less than 5%.
The current reduced rate list includes a category
for the "supply, construction, renovation and alteration
of housing provided as part of a social policy". In its current
form, Annex H does not include repair and maintenance work.
The Commission has made proposals to amend Annex
H to clarify the reduced rate provision by removing the distinction
that housing should be "provided as part of a social policy"
and by specifying the inclusion of the repair and maintenance
of housing. If that proposal is agreed, the Government will examine
the potential costs and benefits of applying a wider relief in
the UK, focusing on those measures which offer the best-targeted
and most efficient support for its key social objectives.
We have yet to see any detailed cost-benefit
analysis in support of the case for a reduced VAT rate to be applied
to repair and maintenance of historic buildings. We would need
to see evidence that a blanket reduced rate for all repair and
maintenance work would be an efficient and well-targeted use of
resources. We would need to be reassured that the absence of a
reduced VAT rate on repairs does hinder the maintenance of historic
buildings and that most of the benefit would not just go to middle
and higher income households making improvements to houses already
in a good state of repair.
In your letter, you also mentioned the position
on a reduced rate of VAT for repairs to churches. In his Pre-Budget
Report in November 2000, the Chancellor made clear this Government's
particular concern for listed buildings used as places of worship.
We recognise the importance of these buildings within their communities,
and that the need to use specialist craftsmen and costly materials
means that their upkeep can be a heavy burden, particularly on
small congregations. That is why then we asked the European Commission
at that time to bring forward proposals to extend the categories
of permitted reduced VAT rates in Annex H of the Directive to
include the repair and maintenance of listed places of worship.
We have been negotiating hard with our European
partners on a review of the EU rules governing reduced VAT rates,
and we are grateful for the continuing support that churches and
other faith groups are giving to our case by making their point
of view known to the Commission. Although at this time the future
of these negotiations is uncertain, it remains one of our objectives
to achieve a reduced rate of VAT for repairs and maintenance to
listed places of worship.
In the meantime, we continue to provide support
through the Listed Places of Worship Grant Scheme, which has paid
out grants of over £17 million to help support repairs to
thousands of places of worship since it began in 2001. In December
2003 the Chancellor announced that funding for the grant scheme
is in place for a further two years, until the end of March 2006,
and in this year's Budget we extended the grants to cover the
full cost of VAT.
TAX CREDITS
The US tax credit system provides an incentive
for the owners of historic buildings that have a continuing commercial
life to bring them back into use. Its impact seems to have been
modest and to carry quite a high cost to the Treasury. The system
also appears to be fairly complex and bureaucratic.
It is also worth noting that a US-style tax
credit would not support the restoration of buildings owned by
non-taxpayers, including religious and educational organisations,
charities, the National Trust, Local Authorities and the Government.
Nor would it help the numerous buildings that have no business
use, including churches, ancient monuments, cemeteries, parks
and ruins.
Before considering such a system for the UK,
we would need to see evidence that there is a market failure in
the UK handicapping the restoration and re-use of historic buildings
that are commercially viable. A case would need to be made to
demonstrate the benefits of tax relief over existing Government
direct/grant support for the repair, restoration and conversion
of historic buildings (including targeted schemes administered
by, for example, English Heritage, Historic Scotland, Northern
Ireland's Environment and Heritage Service, Cadw, the Countryside
Agency, DEFRA, ODPM, Regional Development Agencies).
However, the Government has introduced measures
that support the regeneration of deprived areas. These include
flat conversion allowances; VAT reductions for residential conversions
and renovations; enhanced tax relief for cleaning up contaminated
land; stamp duty exemptions for all properties up to £150,000
in disadvantaged areas, abolition of stamp duty on all non-residential
property transfers in disadvantaged areas; and introduced the
Community Investment Tax Relief (to stimulate private investment
in disadvantaged areas).
VACANT BUILDINGS
AND THE
PAYMENT OF
BUSINESS RATES
Finally, you mention vacant buildings and the
payment of business rates. In general there will be no business
rates to pay for the first three months that a property is empty
and unused. After that time, the owner will have to pay an empty
property rate bill which is 50% of the normal bill.
However, for industrial buildings, listed buildings
and small properties with rateable values of less than £1,900,
the owner does not have to pay empty property rates even after
the first three months have passed.
The rationale for this is based on the fact
that rates are generally based on occupation. The 50% empty property
rate is there to encourage owners to fill their properties with
tenants. This should encourage them to think of innovative ways
to improve, develop or adapt their property so that it would be
attractive for a tenant. A listed building, however, cannot always
be easily adapted for a different use and the listing may itself
restrict the degree of development that can be undertaken. Similar
considerations apply for industrial and small properties. On this
basis, they are entitled to remain exempt from business rates
when empty beyond the three-month restriction. I understand the
intention to encourage redevelopment and regeneration but we think
that a balance needs to be struck that takes into account the
ability to adapt to a business use.
I hope this information is helpful to your Committee
as it continues its inquiry.
John Healey MP
29 April 2004
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