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Construction – Relevant Charitable Purpose

The construction of a property can be expensive…even more so if VAT is added to the price.  However in certain situations, the construction of a building can be zero-rated.  In this article we look at buildings that are to be used for a relevant charitable purpose and what that means when it comes to obtaining zero rating on the construction of a new building. 

A building is used for a relevant charitable purpose if it is used:

  • Otherwise than in the course or furtherance of business, or
  • As a village hall or similar in providing social or recreational facilities for a local community

Zero-rating can also apply to an annexe to be used for a relevant charitable purpose as long as:

  • It is capable of functioning independently from the existing building; and
  • The annexe and the existing building each has its own independent main access.

Before we expand on what this all means, it makes sense to outline the extent to which the zero-rate applies.  It can apply to services supplied in the course of construction of the building prior to completion and any goods that are incorporated into the building that are not specifically excluded from the zero rating (e.g. carpet, white goods etc.). The supply of architectural, surveying, consultancy and supervisory services is always standard rated, regardless of the VAT liability of the building work.  Certain services closely connected with construction can also qualify for zero-rating, for example demolition, site security.

In order for the contractor to zero-rate their supplies they must hold a valid certificate that confirms the building is intended to be used solely for a relevant charitable purpose. This certificate is issued by the customer of the zero-rated works. This certificate does not extend to supplies made by subcontractors and therefore their supplies to the contractor are standard rated.

It is important to note that this relief extends to entities recognised by HMRC as a charity for tax purposes in addition to registered charities.

Otherwise than in the course of furtherance of business

A building is used otherwise than in the course of furtherance of business if the building is not used to generate ‘business’ income. For VAT purpose income is considered to be ‘business’ if payment is made for a service provided and there is a direct and immediate link between the payment received and the supply made. For many charities, the majority of income received will be considered ‘non-business’ because the service offered is made for no payment, they are instead funded by grants, donations or fundraising proceeds. There is no direct and immediate link between the payment received and the service provided.

HMRC considers that a building is used otherwise in the course or furtherance of business if at least 95% of its use is for charitable purposes. HMRC typically exercise their discretion to allow a small, incidental amount of business usage. Examples of buildings used for non-business purposes given by HMRC include places of worship, school buildings and scout huts.  However it can also apply to schools or nurseries that either do not charge a fee or charge a nominal fee and rely on donations.

As a village hall or similar

For a building to be classed as a village hall or similar there must be a high degree of local community involvement in the operation of the building and a wide variety of activities for recreational, social and sporting purposes carried out in the building.  However, this is quite subjective and there is a significant amount of case law in this area which has looked at whether sports clubs, pavilions and theatres can qualify. If a proposed project has a significant amount of community use and involvement it is worth exploring whether zero-rating could apply.

Charitable Annexe

An annexe is considered to be a structure that is attached to an existing building but in a way that is not considered an extension.  Typically any additional building would be considered an extension if it made the existing space bigger to provide more space for the same use.  An annexe would provide more space for a different use.  HMRC use the term ‘distinct from but associated with the activities carried out in the existing building.’  The key point is to ensure that the are independent both in terms of access and operation.  This could be a nursery attached to a school or church.

An unexpected VAT bill could be a significant financial burden as many charitable entities cannot claim this VAT back. It is always advisable to take VAT advice before construction work commences to see whether it is possible to obtain zero-rating for the project.

We have a wealth of experience with dealing with construction projects and would be happy to discuss your development with you to see whether you would qualify for VAT relief.

If you would like more information or you would like to discuss how we can help you please call our VAT partner, Alison Birch.

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Charity Newsletter January 2019