Murky waters for VAT treatment of charitable buildings

An ongoing charity VAT case could have important implications regarding recent and future capital projects. The case of Longridge on the Thames [2014] UKUT 504 is currently with the Court of Appeal and we’re awaiting the (imminent) ruling.

In the current economic climate charities are feeling the pinch and funds are being stretched, particularly when it comes to capital projects. A positive saving grace available for charities comes in the form of the 0% VAT rate, which is available on the construction of a new charitable building. Needless to say, not having to worry about funding an additional 20% can be a huge bonus.

One of the conditions of this rate is that the building must be used “solely” for charitable purposes, which HMRC take to mean “otherwise in the course or furtherance of a business”. HMRC interpret this as a charity not raising any charges for activities within the building – the point that could have significant ramifications for Longridge and many other charities.

Longridge is a charity formed ‘for the advancement of education in water, outdoor and indoor activities for young people generally’. It arranged for the construction of a training centre on a site that it owns on the River Thames assuming zero rating would be available; however, HMRC issued a ruling that the construction of the centre was standard-rated, and the charity appealed.

Both the VAT Tribunal and Upper Tribunal agreed with Longridge and considered that, although charges were made for participation in activities at the centre, it was run by volunteers and access to activities was largely heavily subsidised so it was not run in the course of furtherance of a business. HMRC has appealed the case to the Court of Appeal.

In the current uncertain context, charities should consider carefully what activities will take place in their buildings to ensure that the 0% VAT rate can be obtained on works, particularly as HMRC can revisit this and apply VAT retrospectively if the building is not used for its original purpose and there are different activities taking place.

Some charities may have obtained zero rating on the basis of this case so should take note of the outcome, as it may have a significant impact on past and future projects.