Focus: Finance and Governance - Outlook - VAT on new buildings depends on use

Adrian Houstoun, VAT partner with accountancy firm Kingston Smith

You ask your fundraiser to fund a new building project and he replies: "How much of the VAT do we have to fund?" This is a difficult question to answer, as these examples illustrate.

Your fundraiser might have thought that a charitable building would be free of VAT. However, since the case of Robert Gordon College (a registered charity and a fee-paying school) in which HM Revenue & Customs won the argument that it was a business and the building standard-rated, such projects have failed to attract the VAT status of zero rating.

Consider Yarburgh Children's Trust, which received rent for a building let to a playgroup. The court held that it is the intended use of the building by the tenant that is relevant, not the intentions of the landlord.

The tenant was a playgroup charity, so it could claim zero rating on the construction.

The next case was St Paul's Community Project. Part of the charity's new building was designated for use as a day nursery, and HMRC unsuccessfully argued that the building costs were standard-rated because it was a business transaction. The court held that use partly as a day nursery was not a business transaction. The construction and operating costs were funded mainly by grants, supplemented by donations, fundraising and fees by users of the nursery, and the construction was zero-rated. HMRC now accepts that the provision of nursery facilities by charities is not a business activity.

Nursery charities are not the only ones for which the construction of a building has benefited following a successful case. Agudas Israel Housing Association needed additional accommodation and built extra units on top of an existing building. Each of the units could have a refrigerator, a kettle and a microwave cooker. HMRC argued that the construction was subject to standard-rated VAT because the units were not "self-contained living accommodation" and a dwelling should be designed for cooking, eating and sleeping.

The tribunal said premises with their own front door, en suite bathing and cooking facilities in the shape of a microwave and a kettle are considered to be self-contained accommodation.

These cases show that it is worth analysing your charity's VAT situation and challenging the perceived wisdom if necessary.

However, not all cases are won by charities. For example, South Aston Community Association obtained funding to construct a community centre and sub-let the upper floor to an adult education college. HMRC considered that construction of the centre was subject to VAT at the standard rate.

The association argued that the college was providing social facilities to the community. The final judgement was that the building was not wholly intended to be used by the association for charitable purposes and the building works were therefore standard-rated.

Each case must be judged individually - but, as these cases illustrate, there is now a greater chance of being free of VAT than before.

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