Charity Article: November 2014 Buildings Constructed for a Charitable Purpose: What Zero Rating for Construction Services could your charity access?
25th November 2014
Even a charitable organisation which is not VAT registered will often face the question of whether they have to pay VAT on the construction of a new building. Frequently it comes as a real surprise for the charity to learn that the building costs will be subject to VAT at 20% - often funding and donations have been raised to fund the build costs and professional fees but not the VAT!
Being a Charity does not exclude the body from having to pay VAT on the costs of any construction project although there are some specific VAT reliefs available on new construction projects for commercial buildings - if the charity can show that the building will be put to a non-business use.
A recent VAT case which may prove of use to charities facing this sort of project is Longridge on the Thames. This charity, which provides boating and other water related courses and activities from its facilities, had appealed to the First Tier Tribunal as a result of HMRC’s decision that they could not secure zero rating on the construction of a new training centre on the banks of the Thames. The Charity won the day at the First Tier but HMRC appealed against that decision and took the case to the Upper Tier which has recently reported its findings.
The decision of the court was that the charity was entitled to receive the construction services at the zero rate which is obviously great news for the charity. What is of interest is the basis on which the courts accepted that the charity was putting the building to a non-business use EVEN THOUGH in the building it would be running a range of activity courses at specific prices for young people and their families to attend.
Where a charity provides services such as training for a charge this would be regarded as a business activity by the charity even though the VAT treatment applying to the training may be a VAT exempt rather than a taxable one.
In the simplest terms where a charity has a commercial building built which it can show it will use for wholly non business purposes then it can access the zero rate relief for the builder to apply to the build costs. Indeed even if there are a small amount of business activities in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) then the zero rate can still apply to the whole building. Charities can also
look at a pro rata on the build costs if they have a clearly defined part of a building used for non-business whilst the rest has a business use.
Clearly it is not without its VAT nuances if the charity is to get the VAT treatment correct on building costs, especially when the charity has to ensure that any zero rating it secured, as a result of intending to use the building for a non-business use, is not impacted by a change of intention to business purposes in the years after completion.
Longridge is a case determined on its particular facts, of course, but it could be helpful in arguing the point that even where a charity makes charges for the activities which it runs in that building this may still not prejudice the securing of VAT zero rating on the build costs.
Longridge successfully argued that the prices for the courses were subsidized to ensure their affordability by young people who were the target audience within the objectives of the charity – that this was to provide a centre of excellence for the advancement of education in water, outdoor and indoor activities for young people – and that this objective was achieved through the provision of the facilities and courses. Often course fees would be waived by the trustees and as all the capital projects were funded by donations or grants then none of the income from the subsidized course charges could be linked to capital expenditure. The supply of courses was accepted by the courts as being incidental to its primary chartable objective as noted above and did not infringe on their ability to access a zero rating relief based on the non-business qualification.
This “looking through” approach is an interesting one to consider and could be a valuable insight for charities to consider when they look at accessing the zero rate reliefs in this area. Recognise, however, that HMRC did appeal against the original tribunal’s view and took the case forward to the Upper Tribunal – all of which would involve time and resource costs for the charity to bear if they had lost the case. The fact that HMRC then lost their appeal at the Upper Tribunal doesn’t mean that they would not have the appetite to challenge other charities who argue that any business activities undertaken in a building are incidental to the overarching charitable objectives.
It’s a case I think we will hear more of in the future.
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