Build November_2016

Build Magazine 38 Legal The UK VAT legislation has provided certain tax breaks for charities to aid their charitable and philanthropic efforts, including the ability to obtain construction services for new buildings at the zero per cent rate of VAT. This saves a substantial amount of VAT for many charities which would have otherwise been charged at the standard rate of 20 per cent which would have been irrecoverable for most. Given large amounts of money are likely to be involved, it is important to ensure the availability of VAT relief is considered at the outset of any construction project. he VAT relief for the construction of new buildings requires the charity to have an intention to use the newly constructed building solely for a “relevant charitable purpose”. Although many charities would consider all their activities charitable, this is not always straightforward and care must be taken to consider the relevant VAT rules in more detail before committing to any construction works. What Counts As “Relevant Charitable Purpose”? VAT is a tax on consumption charged on goods and services, so when a charity provides goods and services for any consideration, this will generally be deemed to be a business activity by HMRC. In order to qualify for the VAT relief, the intention must be to use the new commercial building solely for a “relevant charitable purpose”. In this context, this means for a non-business purpose and not as an office (no business activities can arise from the building). In respect of the “solely” part, HMRC accepts that 5 per cent non-qualifying use can be allowed (based on a fair and reasonable measure of use). It is easy to fall foul of the requirement to be solely using a building for a “relevant charitable purpose”, as many charities may have activities that are considered to be business activities for VAT purposes without necessarily knowing. This could be through sponsorship income from third parties, fund raising events, or website advertising. Therefore, care must be taken by charities when trying to avail themselves of the VAT relief that they are able to demonstrate that their business use will not exceed 5 per cent of the total use in order to meet the “solely” for a “relevant charitable purpose” test. Under Construction: Developments in VAT for Charities T Recent Case Developments Last month the Court of Appeal released its decision in the Longridge on the Thames case (Longridge on the Thames v HMRC [2016] EWCA Civ 930). Here the charity, Longridge on the Thames, which runs water-based and other outdoor activities for children, paid VAT on the construction costs of a new training centre at the time but argued VAT should not have been charged as the construction services should have been zero-rated. They therefore made a claim to be refunded the VAT paid. The Court of Appeal overturned two earlier Tribunal decisions that supported Longridge on the Thames, ruling their heavily subsidised charges for services (adjusted to meet the ability of the end user to pay) were in fact business activities. Therefore, they did not qualify for VAT relief on the construction of the new training centre. The Court of Appeal expressly noted that a charity did not enjoy “blanket relief from VAT for its activities”’. The liability to VAT depends on whether activities are economic activities, judged objectively. Agreeing with HMRC, the Court of Appeal held that if there was a direct link between the service and the money received by the service provider, an economic activity was established. There was no exception for activities carried out for the benefit of the public, and therefore the use of the new training facility could not be used solely for a “relevant charitable purpose”. HMRC’s Stance For the construction industry, this case highlights the need for clarity when working alongside charities. Understanding whether the project is eligible for zero-rating VAT is crucial, as failing to charge for VAT could cause difficulties and lead to penalties being applied. HMRC’s renewed stance against charities having any business activities could be applied to recent projects even if they are already underway or recently completed. There is a concern that HMRC could look to find past errors for the last 4 years and seek penalties and interest in addition to any VAT amounts due. These latest developments and attitude from HMRC confirm that it is very difficult to draw a line between non-business activity and business activity, it is up to the construction companies to ensure that they do sufficient due diligence to support any decision to apply VAT zero-rating for a charity. Construction companies and charities alike should also ensure they are up-to-date with current VAT developments as the consequences of getting the VAT relief wrong for construction services on charitable buildings can be quite catastrophic. It remains to be seen how Brexit will have an effect on HMRC’s approach. The Longridge on the Thames case was decided on EU VAT law principles and it will be interesting to see if HMRC will seek to continue to apply these principles when EU VAT law ceases to have direct effect. We must wait to see whether these principles will be incorporated into the UK VAT law in due course. by Kamlesh Chauhan, VAT Manager, haysmacintyre.