In last month’s Budget, the Chancellor announced a restriction to the zero rate for caravans, to be effective from 1 October 2012. The measure seeks to remove the zero rate from caravans which are not specifically designed and /or used for residential purposes, and therefore proposes to restrict the zero rate to caravans meeting British Standard 3632 or equivalent. This means that caravans which either do not meet the pre-requisite British Standard or equivalent standard or are not used for all year round residential purposes will no longer be able to benefit from the zero rate.
In practice this means that the zero rate will, from 1 October 2012, only apply to caravans which meet the British Standard and are sited at a location which permits all year round residential use, i.e. where the caravan is sited at a location which prevents all year round occupation, the zero rate will not apply, even if the purchaser regards the caravan as his or her principal private residence. This has the potential to create additional costs for the caravan owner where a caravan is located at a site that prevents all year round occupation, and could lead to different treatments for different tax regimes, e.g. Council Tax and Capital Gains Tax. Nevertheless, the onus will be on the seller of the caravan to apply the correct VAT treatment, and will likely, in cases of doubt, lead to VAT being charged on all sales of caravans, irrespective of their intended use or location. This brings further potential issues for caravan retailers in determining the price. Given that consumers are only likely to be prepared to pay a certain maximum price for a particular model, retailers are unlikely to be able to simply add 20% VAT to the forecourt price. This being the case, consumers are likely to resist a 20% price inflation, and any attempt by the retailer to absorb the price increase will adversely impact on profit margins.
As above, it is not just the caravan itself that needs to meet the relevant criteria; there is also a purposive test. I.e. it is not enough that the caravan meets the British Standard criteria, the caravan must also be purchased for and be capable of being used for all year round residential use. This is considered to mean that any caravan purchased for delivery to a site with residential restrictions, will not achieve the zero rate on its purchase. Nevertheless, where that site includes some all year round residences, the site owner can still benefit from the zero rate for related civil engineering works.
Caravan and site owners beware!
NB – These proposals apply to the actual caravan structure and items ordinarily fixed to caravans. Removable contents from caravans are already subject to VAT at the standard rate.
For further information on this matter contact Karen Mulcahy on 01962 735350.