Charities are entitled to claim relief from VAT when they construct new buildings. This can be a valuable benefit for charities, which are generally not able to recover VAT, but they and the builders undertaking the work for them must take care to ensure that they do qualify for the relief. Both the charity and the builder are at risk of receiving assessments from HMRC for the full value of VAT on the project, unless the work falls fully within the criteria for the relief.
VAT legislation says that services supplied in the course of construction of a building which will be used solely for relevant charitable purposes are zero rated for VAT. Not only does this remove the irrecoverable VAT, but there is no need for the charity to pay the VAT before they are able to claim it back from HMRC.
There are a few qualifying criteria, all of which must be met, before zero rating can apply.
- The services received must be construction services, and not other professional support such as architects or project managers
- The services need to be provided in the course of construction, so not renovating or altering an existing structure
- The work done must be on a building
- The use of the building must be solely for relevant charitable purposes
- The customer must give a certificate to the contractor stating that the work qualifies.
There is no definition in relevant legislation of what counts as a building, in the absence of which we apply the natural meaning of the word. That is, a structure fixed to the ground which consists of walls, or another means to support a roof, and that encloses a volume of space. It should have sufficient scale for human occupation and is generally made of durable materials such as brick or timber. HMRC’s internal manuals maintain, but this is only their view, that only structures with roofs can be buildings.
‘In the course of construction’
There have been numerous VAT tribunal cases about the definition of the phrase ‘in the course of construction’, mainly relating to dwellings, but equally applicable to charitable purpose buildings. Taxpayers have lost their zero rating when part of an existing building is incorporated into a new structure even to the extent of just a foundation stone remaining of the old building. Any existing structure must be demolished to ground level.
There has been a case through the courts recently which demonstrates the risks to both parties inherent in zero rating a project.
Paradise Wildlife Park undertook building work for a related charity Zoological Society of Hertfordshire. That charity operates a zoo which is open to the public, charging entrance fees for visiting the site. Surpluses from opening the zoo to the public are used to support research, education and breeding programs.
The building work was to construct a shop, a new lion enclosure and an outdoor exhibit called World of Dinosaurs. Zoological Society of Hertfordshire gave a certificate to Paradise Wildlife Park, to state that the work qualified for zero rating on the basis that it was a building that it would use for relevant charitable purposes.
The tribunal found that the work did not qualify for relief on two bases. Firstly the structures were not used solely for the charitable purposes of the zoological society. The shop was clearly used for business and the lion enclosure and dinosaur exhibition were open to visitors who paid an admission fee. Even though the surpluses from the visitor income were used for the purposes of the charity, the zoo operated as a business, with prices set based on the costs incurred and facilities provided to attract visitors.
The second problem with the claim for zero rating was that only the shop was actually a building in the ordinary sense of the word. The dinosaur exhibit was a trail through woodland, without walls or a roof. Whilst the lion enclosure did include a building, it was mostly an uncovered enclosure.
HMRC assessed the builder for failing to properly charge VAT at the standard rate, but normally a builder can rely on having received a certificate, so long as a basic examination would show it was reasonable to accept it. By signing a certificate the customer makes themselves liable for a penalty equivalent to 100% of the VAT which should have been charged if the certificate is given in error.
Take reasonable care when claiming relief
Whilst zero rating is a valuable relief for those who cannot claim back VAT incurred, both builders and those claiming the relief need to take reasonable care. The tribunals over the last few years have heard numerous cases, both where the nature of the concession has been misunderstood or not checked in detail and where the nature of the use of the buildings has not been clear cut. With a potential for unexpected VAT at 20% of a project cost, it is wise to check at the outset whether or not zero rating can apply.
For Paradise Wildlife Park, whilst it was true to say that the use would be by a charity, that is not the same as it being used for relevant charitable purposes. More fundamentally the enclosure may have been enough to contain the lions, but it was not enough of a structure to protect them from HMRC.
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