VAT: charity begins at home

According to reports, charities are up in arms over HM Revenue and Customs’
change of policy relating to the treatment of VAT and charitable buildings – but
it’s not all bad news.

The relief threshold for VAT zero-rating has recently been dropped from 10%
to 5% for the proportion of the building that is used for ‘business’ (for
example, a staff canteen as opposed to fundraising activities).

The move could be perceived as yet another challenge to a sector which
traditionally has to shout very loudly to be heard, and especially when income
may have dropped as donors tighten their purse strings.

However, our experience would suggest the changes are proving to offer
greater flexibility to charities.

The removal of ‘extra-statutory concession 3.29’, which relates to the
zero-rating of buildings and construction services for charitable buildings,
does appear to reduce the availability of VAT zero-rating to charities. But,
focusing on the reduced threshold overlooks the positives.

HMRC had actually flagged the planned change with the Charities Tax Group
approximately two years ago as an area they were looking at in light of a court
case which considered HMRC’s use of extra-statutory concessions.

Our understanding is that in future, taxpayers will be able to issue
certificates where they consider they are entitled to receive building or
construction services at the zero-rate without first having to go to HMRC for
approval. In addition, taxpayers will have a right of appeal – something which
they don’t currently have under the concession.

Admittedly, one downside relates to the change of use provisions, which will
be fully enforced. But, on the plus side, the new approach should also apply to
buildings intended to be used for a ‘relevant residential purpose’, which has
never previously had the benefit of an ESC.

Any charitable organisations which had previously failed to obtain VAT
zero-rating, and with no opportunity to previously appeal, may now be able to
re-visit their concession claim and consider whether they would qualify under
the new, potentially more flexible approach.

Both approaches are running in tandem until 1 July 2010 and arguably will
give charities much more flexibility in determining which method they use to
ascertain their entitlement to zero-rating.

Helen Devenney is a tax partner at
Deloitte