INSURANCE Advice
HOWMUCH VATSHOULDYOU BEPAYING? If you have tomake amajor claim
against your buildings insurance, VAT will be an important aspect of
the rebuild cost, explains ROGER CORp
THE COST OF REBUILDING a block of flats whichneedstobesubstantially reconstructed - as opposed to repaired - following amajor incident,iszerorated forthe purposeofVAT. Thismeans that VATdoesnot need to be added to therebuildcostwhen your insurer calculates thesumthat your blockistobe
insuredfor.Roads andboundaryfences also qualify forzerorating, as do garages. However, thereare various aspects of rebuilding worksthatcannotbezerorated.
Theseinclude thefollowing: nDetached buildingscomprisingswimming pools, tenniscourts, stablesand otherleisure
(as opposed to residential) facilities. nLandscaping, fishponds, rockeriesand garden wallsunlessthe work is closely connectedtothe construction of thebuilding,
as defined in the relevantHMRC Notice. nFees and demolitions. What thismeans is that if the cost of fees, demolitionsand anyrelevantworks that are standard ratedadd up to,say,25% of thetotal rebuildcost,VAT will need to be added to thisamount only andnot to thetotal cost of rebuilding. Clientsoften assumethat if aresidential
building is more than 80% destroyedwhen compared to thesuminsured, therepair cost will be subjecttoVAT andatthe current 20%rate, thesuminsured will be exceeded andconsequentlyVAT should be added in total. However, thereality is that aseverely damagedbuilding (eg: 80%+destroyed) would be morecost effective to demolish andrebuild, rather than repair. Guidance fromHMRC is contained in VAT
Notice 708. It explains that abuilding is zero ratedfor VATwhenitisbuiltfrom scratch with the proviso that before work
starts anypre-existingbuilding is demolished completely to ground level(although cellars, basementsand thefoundationslabmay be retained). Azerorated building is also allowedtomakeuse of asinglefacade (or double facade on a corner site) provided the existing building is demolished completely (other than the retained facade) before work on thenew building is startedsolongasthe
is appliedto rebuilding works will affect your suminsured
facade is retained as an explicit conditionor requirementofstatutory planning consent. In termsofrepaireddamageonresidential
buildingswhere VATisirrecoverable,itis usualpracticefor insurers to paythe VAT elementuptothe suminsured –the sum insuredbeing basedonthe totalrebuildcost fromscratchasopposed to therepaircost.
ArEYOUVAT rEgiSTErED? Whilemost owners of residentialbuildings
Where a block includes commercial units, only therebuildcost of flats, not shops is zero-rated
Theway inwhichVAT
are not VAT registered, someare. If the building ownerisVAT registered andable to recoverVAT,there is no need forVAT to be includedwithinthe rebuildcalculation includingfeesand demolitionsetcwhen setting thebuilding
suminsured.Therefore it is important to let your insurer know if this is the case. Where ablock of flats includescommercial
units, forexamplewherethere areretailshops on the ground floor, the position is slightly different.Herethe rebuildcost of theflats wouldbezeroratedwhilethe shopswould be standard rated, as commercial usedoesnot qualify forzerorating. If thepropertyowner is notVAT registered,VAT will need to be added to the commercial part of the building only; albeit thetotal cost of fees,demolitions and anyrelevantstructureswould be subjectto VATatthe standard rate. Forall buildings, in arriving at theinsurable
amount,themost importantconsideration is to ensure thebaseamountnet of VATiscorrect and then to add VAT as appropriate.●
RogerCorpisaDirector ofBarrettCorp&HarringtonLtd Tel08444124495
Emailroger@bch.uk.com Websitewww.bch.uk.com
This isasimplifiedsummaryandforguidanceonly-professional adviceshould alwaysbetakenonVATmattersandwhensetting thedeclaredvalueorsuminsuredofyourblock.
Flat Living Autumn2012
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