Two recent tribunal cases highlight how complex the VAT rules are and demonstrate why charities should carefully consider all aspects of their property expenditure.
1. Buildings used solely for charitable purposes?
Back in March 2013, Longridge On The Thames, a charity providing outdoor activities, won its case for zero-rating of a newly constructed Training Centre in 2010.
Longridge considered that the construction costs qualified for zero-rating as a building intended for use solely for a relevant charitable purpose (under Item 2 and 4 of Group 5 of Schedule 8 to the Value Added Tax Act 1994). HMRC took the view that, as the charity charged fees for some of its activities, the zero-rating relief should be denied.
Longridge did charge fees. However, their activities were heavily subsidised by donations. The Tribunal needed to consider the criteria below.
Were the charity’s activities:
a) a serious undertaking earnestly pursued or a serious occupation not necessarily confined to commercial or profit-making undertakings;
b) pursued with reasonable or recognisable continuity;
c) of a certain measure or substance;
d) conducted in a regular manner and on sound and recognised business principles;
e) predominantly concerned with the making of taxable supplies to consumers for a consideration and of a kind commonly made by those who seek to profit by them;
f) the same type of activity carried on by others who are clearly doing so on a commercial basis?
The tribunal relied on evidence that the charges were set on the basis of the customer’s ability to pay, with the charity willing to reduce or waive the charges in appropriate circumstances. The tribunal, on balance, decided that this was not consistent with a business activity and allowed the appeal.
2. As an annex capable of functioning independently?
In a more recent case released in August 2013, Chelmsford College lost its appeal to have its new Art and Design Centre zero-rated.
The construction was an annex intended to provide additional space for the College’s Art and Design department. It had its own main access, but was also connected to the main building by an enclosed walkway at first floor level.
Without the walkway, the tribunal considered that the work would have qualified for zero-rating as a completely new and separate building. However, the walkway was the only means of disabled access to the first floor of the new building as it did not have a lift. This made it an annexe to the main building. The tribunal therefore had to decide whether the annex could operate independently from the main building. It failed this test because the two buildings shared a common heating system and therefore the annexe was not eligible for zero-rating.
Both these cases demonstrate the need to consider at the planning stage, not only the status of the charity and the activities it carries out, but also how buildings are constructed and used.