Guest post by Les Howard of vatadvice.org
VAT and property can be an expensive combination!
The good news is that charities can benefit from VAT reliefs in relation to property transactions. These reliefs are welcome but are subject to various conditions and restrictions. It is important that you understand the reliefs which are available to you.
You should note that most works of repair or alteration to an existing building for a charity remain standard rated.
Zero-Rating – New Building
A charity can purchase a new building, or have a new building constructed for it. In both cases, the supply will be zero-rated. The most important condition is that the charity will use it for its charitable activities.
Where you have secured zero-rating, there is a further provision that triggers a VAT charge should you put the building or part of the building to business use within ten years of completion. This ‘change of use’ rule is complex. But essentially, you have to charge yourself VAT, which may or may not be recoverable. Trustees should ensure that, should they consider any change of activity during the first ten years from completion of the building, they seek VAT advice to address and quantify the consequences.
Exemption – Purchase of Existing Building
Where you purchase an existing building, you should check at an early stage of negotiation whether the Vendor has ‘opted to tax.’ This is quite common on commercial buildings, as it enables the owner to recover VAT on costs related to the building. The option to tax means that the sale of the property, which would otherwise be exempt from VAT, becomes standard rated.
If the Vendor has opted to tax, you should indicate that, as a charity intending to use the building for your charitable activity, you can require that the option to tax is ‘disapplied.’ This means the property reverts to being VAT exempt. You then provide a formal disapplication certificate to the Vendor. This is the evidence he will provide to HMRC should they query his VAT Returns.
The charity cannot apply for the option to tax to be disapplied if it intends to use the space as an office. HMRC advise that this means an ‘administrative’ office. For example, where a charity uses rooms to be used for counselling clients, that is not an office, but space for a HR or finance function is an office. It may be therefore that the option to tax is only partly disapplied.
Exemption – Property Rental
Where you rent space in a building, you should check whether the landlord has opted to tax. This is quite common for commercial buildings, as it allows the landlord to recover VAT on costs related to the building. The option to tax means that rental which would otherwise be exempt from VAT, becomes standard rated. For most charities, this is an additional unwelcome cost.
If the landlord has opted to tax, you should indicate that as a charity intending to use the building (or part) for your charitable activity, you can require that the option to tax is ‘disapplied.’ This means the rental reverts to being VAT exempt. You then provide a formal disapplication certificate to the Vendor. This is the evidence he will provide to HMRC should they query his VAT Returns.
Do note that this provision applies equally to a long term lease of a warehouse, for example, as to the use of a hotel conference suite for an evening Board Meeting.
The charity cannot apply for the option to tax to be disapplied if it intends to use the space as an office. HMRC advise that this means an ‘administrative’ office. For example, where a charity uses rooms to be used for counselling clients, that is not an office, but space for a HR or finance function is an office. It may be therefore that the option to tax is only partly disapplied.
Mixed Use – Charity and Business Activity
The above guidance assumes that the charity will use the building solely for its charitable activities. Of course, it may be that the charity will use it for both business and charitable activities. If so, then zero-rating or exemption will only be allowed in part. You should advise the other party of this, ideally including the proportions of business and charity activity. The certificates referred above to will need to be amended to reflect this ‘mixed’ use. You should expect to pay VAT for any areas used for business use, and not for those areas used for charitable activity.
Where you have a space that has mixed use, or where the proportions of charity and business use change over time, life gets more complex. Rather than trying to explain the various scenarios, we suggest you seek professional advice.
Accessibility Works
Where a charity engages a contractor to carry out certain accessibility works, those works are eligible to be zero-rated. The charity should flag to the contractor before the works are carried out that zero-rating is appropriate.
The range of works is described in VAT Notice 701/7, chapter 6. This chapter describes works supplied to disabled persons as well as to charities. Broadly put, there are three types of works to which zero-rating can apply:
Ramps, doorways, and passages – Zero-rating is available for the creation of a new ramp, but not to varying the gradient of an existing ramp, nor to removing a ramp. The ramp may be internal, or external as long as it allows a person access into or within the building.
Bathrooms, washrooms, and toilets – Zero-rating is available for the creation of a new facility and to works to an existing facility. Zero-rating extends to preparatory, and restoration works and to making good.
Lifts – Oddly, most lifts installed in charity buildings do not enjoy zero-rating. The exception is where the charity is providing either a permanent or temporary residential facility or a day centre for disabled persons. Where a charity provides a lift simply to allow disabled persons access to other floors, the installation is standard rated.
In our experience building contractors are very keen to help charities ‘save’ VAT in this way. If you explain the rules, they will help quantity the ‘qualifying’ works.
Certification
For each of the above matters, you will need to provide a formal certificate of either zero-rating or exemption to the other party. The HMRC website contains relevant templates.
We think an informal approach is prudent in the first instance, as property negotiations can be sensitive This allows the other party to seek their own VAT advice. Once agreed, a correctly worded certificate can be provided.
P.S. there is no excuse for not taking good professional advice on any property transaction. It is not sufficient to google or to guess. It is rarely too early to receive advice, but it can be too late!
You can find out more about Les Howard and connect with him here via LinkedIn
