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Steve Allen of VATAdvisers Ltd comments on an unfortunate change in VAT treatment with an adverse affect on charities.

Introduction

Charities are still reeling from HMRC’s recent announcement that a key property VAT concession is being withdrawn.  The view coming from the VAT and tax advisers is that the loss of the concession will have a devastating effect on the charitable sector.

Background - Extent of non-Charitable Use

In Revenue & Customs Brief 39/09 and VAT Information Sheet 08/09, HMRC said that from 1 July 2009, they are withdrawing the concession which allows zero-rating still to be applied to the construction or purchase of a new charitable building where there will be a minimum of 90% charitable use. The concession (ESC 3.29) enables a building to meet the statutory condition of being used ‘solely for a relevant charitable purpose’, but from 1 July 2009, the term ‘solely’ will only be met where there is a minimum 95% charitable use. On the upside, the new limit does not need HMRC permission to be adopted, and charities will no longer need to use one of the three prescribed calculation methods either – any reasonable calculation will now be accepted. HMRC have put in place a 12-month transitional period to 30 June 2010 whereby charities still have the option of using the outgoing concession instead of the new rules, but from 1 July 2010, everyone will have to comply with the 95% limit. Under the new regime, where zero-rating will by statute rather than concession, the ‘change of use rules’ will apply, so HMRC will be expecting charities to do an annual check to ensure the 95% criterion is still being met. 

Keith Hickey, Chief Executive of the Charity Finance Directors Group, said charities have reason to be concerned, and that his organisation will lobby the Government to reverse the change.

He said,

“The [financial] situation will now only become worse. We're confused as to why HMRC should have changed their interpretation of 'solely' charitable use from 90% to 95%. This action does not suggest a government that is putting charities at the heart of its thinking. Given the complete lack of consultation and the speed with which this change was introduced, we have to believe that this will be a significant cost to the sector.” 

Kevin Barnes, director of finance at Barnardo’s, said the policy change will have widespread financial implications for charities and described it as a “cause for concern.”

According to a spokesman for HMRC, the concession was specifically reviewed by the Department in 2007, but he conceded no formal consultation was entered into with the charity sector. The spokesman also said that HMRC does not anticipate any tax to be generated from the removal of the concession, and expects most, if not all, charities who previously qualified for the 0% rate, to continue to benefit under the revised rules.  Clearly then, there are no new charitable buildings out there that either have or will have 90-95% charitable use!

Comment

If you have a charity client potentially affected by this, you should seek immediate VAT advice to check whether zero-rating can still be applied.

The above article is taken from VAT Voice, a bi-monthly publication from VAT Solutions (UK) Ltd. To subscribe to VAT Voice, visit TaxationWeb's Tax Bookshop ( VAT Voice ).