VAT blow for charities, colleges and city academies

HMRC have announced the withdrawal of an important VAT concession that is likely to result in significant extra cost for charities.

Charities do not pay VAT on the construction/acquisition costs of new buildings provided the building is used solely for charitable purposes.  Until now, HMRC's interpretation of 'solely' meant at least 90% charitable use, essentially allowing charities some business use.

This ‘90%’ concession was invaluable for charities such as further education colleges as the teaching of students aged over 19, for example, is regarded as a business activity.  Equally, city academies put their buildings to business use as well as charitable use. Without the concession, it is likely that many charities would not be able to acquire buildings free of VAT. As charities cannot recover all the VAT they are charged, the VAT on top of the construction/purchase costs would represent a huge cost, making some projects unviable.

The withdrawal of the concession from 1 July 2010 is therefore very bad news for many charities. In place of the concession, HMRC say that they believe 'solely' is to be interpreted as meaning that the building must be used for at least 95% charitable use. Compounding the change is the added requirement for the charity to monitor the use of the building over the next 10 years.  If the building is put to more business use than envisaged when the charity acquired the VAT-free building, it will need to pay an output tax charge.  Previously, the concession in place allowed any change of use to be disregarded if the change was not envisaged at the date of acquisition.

Steve Hodgetts, VAT partner at Baker Tilly commented: "This is a blow for charities but some charities may benefit from the concession withdrawal.  Those that did not meet the 90% charitable use test when considering the floor space of the building or the time spent / number of staff working on charitable activities were until now unable to obtain VAT-free buildings.  However, under the new 95% rule, HMRC say that they will consider any method for calculating use provided it is 'fair and reasonable'.”