The VAT charged on the supply of services (other than professional services) in the course of the construction of a building intended for use solely for a relevant charitable purpose is zero-rated (see Schedule 8, Group 5, Item 2 Value Added Tax Act 1994). Provided that the proper documentation is in place, this optimally means that no VAT is payable on the supply of the building materials or on the services of builders - a significant saving for a charity. This article considers the scope of this rule and provides a checklist of the key points taxpayers should consider to benefit from this rule and avert future charges.
What is ‘use solely for a relevant charitable purpose’?
Note 6 to Group 5 (above) provides that:
“Use for a relevant charitable purpose means use by a charity in either or both the following ways, namely -
(a) otherwise than in the course or furtherance of a business;
(b) as a village hall or similarly in providing social or recreational facilities for a local community.”
So, to qualify for the zero-rate, the intended user must be a charity, and the building should not be intended to be used ‘in the course of a business’. A charity’s activities might well fall within the meaning of a ‘business’, despite the charitable intentions behind the activity (e.g. a charity shop). In order to cover costs, many charities charge fees for their services (e.g. a nursery) – would this amount to a business and where is the line drawn in terms of application of the zero-rate?
HMRC has tended to take a wide view of the meaning of ‘course of a business’. HMRC asserts that the intention behind an activity is not relevant to the question of whether that activity is a business, for example a charity shop is clearly a business even though the profits are put towards charity. Note that even where courts have held in favour of taxpayers, HMRC has often appealed these decisions and has been reluctant to apply rulings more widely to other taxpayers in similar situations. HMRC are likely to continue to take a firm approach and so taxpayers planning to use the zero-rate should proceed with an element of caution.
The Tribunal’s approach
The Upper Tribunal recently addressed this question in Revenue and Customs Commissioners v Longridge on the Thames  UKUT 504 (TCC). This case concerned a charity, Longridge on the Thames (“Longridge”), which provides boating and water based education and training primarily for young people. In order to cover its costs, Longridge charged a fee for training courses, though often waived or discounted the fee. The charity decided to construct a training centre, with the intention that it would provide an indoor space to deliver the theory and debriefing aspects of their courses. Longridge claimed that as it is a charity and the intended purpose of the construction was for use otherwise than in the course or furtherance of a business, the zero-rate of VAT should be applied.
HMRC argued that the standard rate of VAT should be applied to the construction as charging a fee for the training courses run from the training centre amounted to carrying on a business. HMRC accepted that Longridge did not always make a profit from such charges and put any profit towards its charitable objectives, but argued this was irrelevant to the question of whether the training centre was intended to be used in the course of a business. The courts will apply the ‘business test’ as set out in ICAEW v C&CE  STC 398 which sets out a series of factors, which if met, would indicate business activity. The intention or motive of the activity is not a relevant factor.
The Tribunal looked to Customs and Excise Commisioners v Yarburgh Children’s Trust  STC 207 (“Yarburgh”) and Customs and Excise Commissioners v St Paul’s Community Project Ltd  EWHC 2490 (Ch) (“St. Paul’s”) for guidance. Both cases featured nursery schools which were allowed to apply the zero-rate despite the fact they charged fees. In Yarburgh, Patten J noted that although HMRC is correct that the motive of the transaction in question should not inform the Tribunal’s reasoning (as even a charitable activity can be a business activity), the Tribunal must ascertain the wider context and have regard to the ‘observable terms and features’ of the transaction.
The Tribunal acknowledged that Longridge provided services for a consideration and so it could be presumed to be engaged in business activity, unless other factors established otherwise. The Tribunal found that there were indeed other factors to be considered which were not indicative of a business: Longridge’s principal charitable objective; the fact that charges were set with a view to affordability for young people and that these charges were often waived; that all capital projects are financed by donation or grants; the reliance on volunteer trainers; and the raising of funds to meet the charity’s costs. Accordingly, the Tribunal held that Longridge does not carry on a business at the site and so VAT should be charged at the zero-rate on the supply of services in the course of construction.
This decision is helpful to charities as it reiterates the findings in Yarburgh and St Paul’s that a charity’s receipt of payment is not conclusive evidence of business activity, and so will not necessarily preclude the application of the zero-rate to construction. The Tribunal will take into account the charitable nature of an activity as part of its ‘observable terms and features’. However, as noted above, HMRC is likely to continue to take a wide view in respect of the business test.
In light of the above analysis, taxpayers should consider the following measures to maximise their benefit from the zero-rate application and avoid future charges:
- Consider potential VAT liability when fundraising for new constructions. If VAT will be payable at the standard rate, this will be a significant increase in your costs which you should plan for from the outset of your project. Remember that even if the motive behind the intended use is ‘charitable’, the activity might nevertheless be ‘business’.
- If applying the zero-rate, prepare a certificate of use which states the building will be used ‘solely for a relevant charitable purpose’ to issue to contractors. This should be in HMRC’s prescribed form, set out in VAT Notice 708.
- Consider whether any fee structures will apply which may prejudice the charitable purposes test, and if so, whether any valid explanations can be made which may preserve the intended charitable treatment.
- For a 10 year period after completion of the building, a taxable charge could arise if the use of the whole or part of the building changes or if the building is sold. Keep an eye on the use of the building – if it is used in the course of a business a self-supply charge may need to be made.
- Take legal advice at the outset to ensure your development has the most efficient tax structure.