VAT on Works in Default


My question is about VAT on works in default. I appreciate that WID may not be the responsibility of every Empty Homes officer but I’m guessing we all work alongside enforcement colleagues who do have this remit and who may have a steer from their finance team.

As an authority we are prepared to use WID in a toolkit of options for tackling the most problematic properties but we don’t want it to be a hollow threat. Concerns have been raised that some owners are happy to wait for us to do the works in default and then pay our invoice because it is cheaper for them as local authorities claim back the VAT, meaning we can’t charge that on to the owner. I’ve been asked how other LAs on the EHN address this issue, is it something that we have to live with or are there ways to make sure that this isn’t the cheap option for owners?

Will Abë

North Norfolk

tax and VAT

That's an interesting point which feels as though it somehow ought to be included in our policy position.
Normally, the sequence would be:
a) council pays for works including VAT (assumes they are using external buliders);
b) council recovers VAT (=input VAT);
c) council charges owner cost of works including VAT (= sale, output VAT);
d) when the owner finally pays up, including the VAT, the VAT is then VAT on income and is passed to hmrc. In that case the owner still pays the VAT.
That process is after all how it works in business generally. Input and output VAT are treated independently.
However it seems that works in default don't count as business activity. See Leicester City Council VAT Manual which identifies the problem with WID.
So the policy "ask" is for HMRC to change the rules so that Works in Default are treated as a business activity - otherwise it is a form of tax avoidance for the owner.
The other policy aspect is that we would like to see VAT harmonisation, meaning zero or reduced VAT on repairs in which case owners would have less incentive to rely on the local authority.  But there are other advantages to letting councils to works in default - you don't have to think about it! So the VAT may not be the only driver here.

Thank you David,
Leicester's manual reflects the advice from our finance team. I suppose this then leads to a supplimentary question on whether any authorities add an administration charge to the bill or charge for things like managing the external contractors involvement. It may not be at the level VAT would have been on an expensive WID but might be a slight disincentive to owners to wait for the Council.

Dear All
The relevant case is GLASGOW CITY COUNCIL v COMMISSIONERS OF CUSTOMS & EXCISE (NO.15491) (1998) - Please see below
I contacted the HMRC about 14 months ago and they still considered the above case law as the current position.
In that you are unable to charge the defaulter vat on the works.
Therefore, it is important to ensure that you recover all costs associated with undertaking the works in default, not just the contractors costs.
Some LAs such as Manchester have a set percentage rate based on the costs of the works, which has been upheld to be reasonable. They will of course have a pedigree of doing many works in default and therefore can provide sufficient evidence to support this approach.
If you do not undertake a significant amount of works in default, then you should record your time on the file (hourly rate including establishments costs), travel, postage, managing the work, site inspections, drafting the demand, warrant applications, even rehousing costs.
Remember the useful Section 36 Local Government Act 197, which provides that were a local authority is empowered by statute to carry out works, they can recover their reasonable expenses including establishments charges from the relevant person.
So if you recover all your costs then this should come close to the 20% vat.
I have in some cases used this as a positive aspect when dealing with owners who are negative equity or do not have funds to undertake the works
The fact that if they are passive, then I can do the works cheaper than what they would pay through the open market.
Very few landlords/owners have the requisite knowledge to know that vat is not chargeable on works in default
I am therefore doubtful that this would be the driving force behind them not undertaking the works in compliance with the notice.
Especially as the LA has the option in most cases to proseucte as well as WID - so a risk to the owner to adopt this approach
Andrew Lavender
Recovery of costs of repair of private houses from their owners by a local authority under a statutory scheme was not subject to VAT.
Appeal by a local authority against a decision of the Commissioners of Customs and Excise that certain building works and activities were subject to VAT. The appellant was a public authority and registered for VAT. Under s.108 Housing (Scotland) Act 1987, the appellant would arrange for certain defects in private houses to be rectified. This involved payment of builders' and architects 'accounts. The appellant would then seek to recover from the house owners in question the charges and VAT incurred. The appellant would not make a profit. Sections 1, 2 and 4 Value Added Tax Act 1994 charged VAT on the supply of goods or services for consideration made by a registered person in the course or furtherance of business. The Commissioners decided that those recoverable expenses were themselves subject to VAT.
HELD: (1) The whole procedure under the 1987 Act had a compulsory flavour to it. The obligation on the house owner to pay was statutory not contractual. (2) There was no supply for consideration. Even if there had been a supply for consideration, it was not in the course or furtherance of business. (3) Article 4.5 Sixth EC VAT Directive provided that the exclusion from VAT for certain activities of public authorities was not available when such treatment would lead to significant distortions of competition. However this provision had not been transposed into national law and could not be relied on against the appellant. The onus of proof would have been on the Commissioners and, in any event, there was no significant distortion of competition. Apple & Pear Development Council v Customs & Excise Commissioners (1988) 2 All ER 922, Customs & Excise Commissioners v Morrison's Academy Boarding Houses Association (1978) STC 1,Westminster City Council v Customs and Excise Commissioners (1989) VATTR 71, ICAEW v Customs & Excise Commissioners (1997) Times, March 29, 1999 and Ufficio Distrettuale delleImposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino (1991) STC 205 considered.

Hi Andrew
If I have read your very useful material correctly then the fly in the ointment is the wording in the 1994 VAT Act. It is not clear whether the EC Directive would prohibit the UK from charging VAT on WID: that Directive seems to be concerned with the other aspect ie deliberately NOT charging VAT (based on the extract above - I haven't looked at the original).
So potentially there is a "policy ask" there ie change the law to render the court decision referenced above no longer applicable.
However you also make the point that you use the absence of VAT as a lever to attract owners to engage with you on some occasions and the question then is whether changing the rules to allow VAT on WID would then scupper such a negotiating position. I am a little unclear as to the basis on which the council would be doing works when you are negotiating with owners i.e. what would the bigger scheme be and how that affects the picture.
Also, presumably the same scenario that arises with WID also arises with EDMOs meaning again there is a potential trade-off between being able to negotiate a voluntary EDMO on the back of "no VAT" and cynical owners being happy to be EDMOd because they benefit from the absence of VAT and hassle.  For most EDMO properties the VAT would only be 5% as they are normally empty for over 2 years and the process via a council is likely to be more costly than an owner commissioning the works themselves. But higher costs also could impair viability ie make it harder to recover the money spent over 7 years.
This asumes there is no VAT on works to adn EDMO property - but is that true? Or does work on an EDMO property potentially incur VAT anyway because it is carried out by the council "in the shoes" of the owner? Someone out there must know!
In the background, there are broad principles - should owners of anti-social properties benefit from tax concessions? Every pound they save has to be made up by other hard-working (etc etc!) tax-payers.