Expert view: Tax on construction can be complex

The revelation that the VAT cost of land and building construction for the 2012 Olympics had not been budgeted for is a timely reminder for not-for-profit organisations about to embark on building projects.

The key point is that there is no general relief for VAT on buildings constructed by not-for-profit organisations. Charities are the only bodies that are granted any type of VAT relief on construction.

There are three broad categories of relief available under UK VAT law. First, builders constructing a qualifying building or annex for a charity, which will be used solely for non-business activity, should not charge VAT on their services and building materials.

Second, builders constructing social or recreational facilities for local community use should not charge VAT to the charity on fees and materials.

Finally, VAT refunds are available to 'specified bodies' that purchase land or construct buildings. Specified bodies can include charities and community associations that carry out a 'local authority' function.

But what is meant by 'non-business activity' and 'qualifying building'? Non-business activity and income usually include donations, grants, voluntary services and investment income, and a qualifying building is one used by a charity for non-business activity.

The definition of 'charity' for VAT purposes is wider than a registered charity, but many non-profit-making bodies do not have charitable status for these purposes. If the body does not have charitable status, it must undertake business activities in order to recover VAT. Both of these issues need to be considered in order to optimise the VAT position. It may, for example, be possible for a non-charitable, non-profit-making organisation to enter into a business relationship with a funder in order to recover VAT.

The VAT reliefs available for not-for-profits in the UK are relatively restrictive, so it is essential that appropriate VAT planning advice is taken before any construction work commences. This will enable the charities to factor the appropriate amount of VAT into the budget and ensure that they are not hit with unexpected costs.

KEY POINTS

- There is no general VAT relief for buildings constructed by not-for-profit organisations

- Charities are the only bodies that are granted any type of VAT relief on construction

- There are three categories of relief available under UK VAT law.

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