THIRD SECTOR PROMOTION

Charity property: could you be entitled to a huge VAT saving?

Third Sector Promotion Markel

When a property is being constructed, VAT is charged at the standard rate. But if you're a charity, health body, educational institution, housing association or finance house, the work may well fall into a category that justifies zero-rating - and you could make a massive saving

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

 

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Register
Already registered?
Sign in

Expert Articles: Risk Management

Advice on risk from Markel, a specialist insurance company working with charities, community groups, trustees, social enterprises and care providers.

Winter is coming: Are you ready?

Promotion from Markel

With the onset of winter, the chances of severe disruptions to your business operations increase. But, if you have a contingency plan in place you can act swiftly to mitigate and minimise the risks

How to claim Gift Aid and who is eligible

Promotion from Markel

From small one-off cash contributions to a sizeable sum from a wealthy donor, the ability to claim back an additional 25% on donations through Gift Aid offers charities the chance to make philanthropy go further

What to do in the case of a breach: cyber fraud #2

Promotion from Markel

In the second part of our series, we look at how to respond to a breach.

How bad can cyber crime really get: cyber fraud #1

Promotion from Markel

In the first of a series, we investigate the risks to charities from having flawed cyber security - and why we need to up our game...

Managing cyber risk in the third sector

Promotion from Markel

Cyber risks should be high on the risk management agenda of third sector organisations as incidents hit the headlines and burden small organisations with increasing frequency.

Charity property: could you be entitled to a huge VAT saving?

Promotion from Markel

When a property is being constructed, VAT is charged at the standard rate. But if you're a charity, health body, educational institution, housing association or finance house, the work may well fall into a category that justifies zero-rating - and you could make a massive saving

Guide to insuring charity premises

Promotion from Markel

Repairing or replacing damaged property can come at great cost to a charity so it's important to ensure you have the correct insurance cover in place. This article explains what you need to consider when insuring your premises

Guide to employing and insuring volunteers

Promotion from Markel

Volunteers play an important part in most charities but without the right practice in place things can go wrong. This article looks at what a charity should consider when employing volunteers.

Third Sector Logo

Get our bulletins. Read more articles. Join a growing community of Third Sector professionals

Register now