In construction planning, it’s hugely important to consider whether the work can (or could, with the right planning) be zero-rated. One category of zero-rating is for a building that is intended to be used solely for a relevant charitable purpose (group 5, schedule 8 of the VAT Act 1994).
A typical situation would be for the new building to be held in a separate entity, then leased to the main entity to be used for a relevant charitable purpose. The letting of the property would not ordinarily be considered as a relevant charitable purpose, so construction would be at the standard rate and not recoverable by the charity. However, one might seek to rely on the principles in the Yarburgh case (Yarburgh Children’s Trust, [2002] STC 207) and argue that the lease of the building is not properly a business activity, so the building is not intended for business use (letting) but for a charitable purpose (ie the use by the main entity).
A recent case shows that there are limits to this approach. In the case of French Education Property Trust Ltd v Revenue and Customs Commissioners ([2015] UKFTT 0620 (TC)), the property was constructed by one entity (a charity) and leased to a second entity (also a charity) that operated a fee-paying school.
The tribunal posed two questions. First, was the property letting a business? Second, was the school a business? If either were a business, the building was not constructed with the intention that it be used solely for a relevant charitable (ie non-business) purpose.
In fact, the tribunal found not only that the property letting was a business, but also that the school was run sufficiently seriously that it constituted a business too. The case of Lord Fisher (Lord Fisher, [1981] STC 238) was considered; as a result, VAT should have been charged on the construction of the building, which was not for a relevant charitable purpose, and a VAT cost would arise to the charity.
Care must therefore be taken when planning to minimise the VAT costs in constructing, leasing and using property. There are complex rules governing how VAT should be applied to works and transactions relating to property, and even after you have navigated the difficulties posed by the legislation and practices, there are limitations that should be considered, as raised in the Yarburgh, Lord Fisher and French Education Property Trust cases.
Kevin Hall is an associate director at Gabelle, Markel’s specialist tax consultancy
