Iain Masterton: VAT issue could sink unsuspecting charities

The recent ruling against a watersports charity might have a significant impact on the sector, writes the VAT specialist

Iain Masterton
Iain Masterton

A ruling earlier this month against a charity’s claims for zero rating for VAT on a new training facility is likely to have a significant impact on other third sector organisations looking to invest in new facilities or capital projects.

Longridge on the Thames, a charity that runs a watersports facility in Marlow, Buckinghamshire, invested in the construction of a new training facility in 2010. It did so believing the costs would qualify for zero rating, reducing its building costs by 20 per cent, amounting to £135,000.

One of the conditions of the zero per cent VAT rate available to third sector organisations is that the facility must be used almost exclusively for charitable purposes, with very limited scope for conducting commercial activities within the building.

Longridge charged fees to some of the visitors using its new centre, but argued that because all this income was used to support its charity work, helping young people from disadvantaged backgrounds, it should apply for the VAT relief. Because volunteers run the centre, the charity considered that any charges it made were not business income but funds that subsidise its charity operations.

HM Revenue & Customs disagreed with this argument. It appeared the charity would prevail after successfully appealing to the First-tier Tribunal in 2013 and Upper Tribunal 18 months later.

This most recent ruling by the Court of Appeal in favour of HMRC, however, carries judicial supremacy over those previous rulings and it now appears the charity will face a hefty bill. While a further appeal from Longridge is possible, I suspect it is unlikely given the costs involved for the charity if it continues to pursue this issue.

It has always been the case that, for the relief to apply, the activities in qualifying buildings or facilities would have to be solely non-business, although HMRC has previously indicated that about 5 per cent of activity – such as the running of a café or shop – would be permissible.

This case shows that charging to subsidise operations to provide cheaper or even free services to disadvantaged groups is not sufficient to qualify for VAT relief on a capital project. The court took a very objective view, ruling that this is deemed to be a business activity, regardless of the rationale for charging fees.

This is a key consideration, and other charities wishing to apply for this VAT relief need to bear it in mind.

It is vital that charities planning new capital investment projects, and budgeting with the expectation of these being zero-VAT-rated, seek advice as early as possible, particularly if commercial activities are expected or required to make the facility or building viable.

This Court of Appeal judgment makes it clear that charities do not enjoy a general relief from VAT. Regardless of how any business activity proceeds might be used, this ruling makes it clear that any intention to obtain regular income from economic activities within a newly built facility could jeopardise the zero VAT rating on the construction of the project. The financial implications can be onerous and might even threaten the long-term viability of the great services that so many charities provide across the UK.

Iain Masterton is a senior manager and VAT specialist at the accountancy firm Chiene +Tait

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