The Value Added Tax (Reduced Rate) Order 2002

Explanatory Note

(This note is not part of the Order)

This Order, which comes into force on 1 June 2002, amends Groups 3, 6 and 7 of Schedule 7A to the Value Added Tax Act 1994. This Schedule contains the Groups of supplies that are subject to the reduced rate of VAT of 5%.

Article 3 of the Order amends Group 3 of Schedule 7A (grant-funded installation of heating equipment or security goods or connection of gas supply). Item 8A is added to the group to extend the reduced rate to the installation, maintenance or repair of renewable source heating systems. New item 8B extends the reduced rate to any goods supplied by the person installing, maintaining or repairing such a system.

The installation etc. must be in the home of a qualifying person (as defined in paragraph 6 of the Notes to the Group), which includes both persons aged 60 or over and those receiving certain types of benefit. In addition, the amendment to paragraph 1(1) of the Notes to the Group ensures that, as with practically all other types of supply described in the Group, these new goods and services only qualify for the reduced rate to the extent that they are funded by a relevant grant.

Paragraph 4(d) of the Notes is amended to substitute “factory-insulated hot water tanks” for “foam-insulated hot water tanks”, thereby extending the reduced rate to tanks insulated using substances other than foam.

A new paragraph 4A of the Notes extends the definition of “central heating systems” to include those systems that generate electricity as well as heat, such as micro combined heat and power systems.

A new paragraph 4B of the Notes defines the meaning of “renewable source heating systems”, the expression used in new items 8A and 8B, as a space or water heating system that uses energy from either renewable sources or near renewable resources.

Article 4 of the Order amends Group 6 (residential conversions). Paragraph 5 of the Notes to Group 6 is amended to provide reduced-rating for the conversion of any building (or part of a building) into a “multiple occupancy dwelling”, whereas the existing reduced rate is available only if the original building contained one or more “single household dwellings” (both these expressions are defined in paragraph 4 of the Notes). It is a condition that there are no multiple occupancy dwellings in the original building.

Paragraph 4 of the Notes is also amended. This makes clear that a building used for a “relevant residential purpose” is not a multiple occupancy dwelling (paragraph 6 of the Notes lists the homes and other institutions and accommodation that are uses for a relevant residential purpose).

Paragraph 7 of the Notes to Group 6 is also amended so as to provide for the reduced rate to apply to conversions of any buildings to buildings to be used solely for a relevant residential purpose, whereas currently the reduced rate requires that the original building contain one or more dwellings.

Article 5 of the Order amends Group 7 (renovations and alterations of dwellings). The amendments to items 1 and 2 and paragraph 2 of the Notes to the Group extend the reduced rate to renovations and alterations of multiple occupancy dwellings and buildings used for a relevant residential purpose, and not just the single household dwellings covered by the current provisions. All three types of building are collectively termed “qualifying residential premises”.

The amended paragraph 3 of the Notes applies what is termed the first empty home condition (the building must not have been lived in for the 3 years prior to the renovation or alteration) to multiple occupancy dwellings and buildings used for a relevant residential purpose too. There is a special rule for buildings that are only a part of a unit used for a relevant residential purpose that requires the whole unit to have been empty for 3 years. The second empty home condition (which allows the person acquiring the building to live in it while the works are carried out) continues to apply only to single household dwellings.

A new paragraph 3A of the Notes extends the reduced rate to renovations and alterations of garages, and to certain works that result in a garage, where the garage is to be used with the renovated or altered qualifying residential premises.

A new paragraph 4A confirms that the reduced rate only applies to the renovation or alteration of a building which was used for a relevant residential purpose when it is intended to be used solely for that purpose and a certificate confirming that intention is issued.