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Andrew Needham of VAT Specialists Ltd points out a change of practice by HM Revenue & Customs which represents potentially bad news for many charities.

Introduction

Charities have been hit by HM Revenue & Customs' recent announcement that a key property VAT concession is to be withdrawn. The view from the charity sector and its advisers is that the loss of the concession will have a devastating effect on the sector.

Business Use

In Revenue & Customs Brief 39/09 and VAT Information Sheet 08/09, HM Revenue & Customs announced that from 1 July 2009, they are withdrawing the concession (ESC 3.29) which allows zero-rating to be applied to the construction or purchase of a new non-business charitable building where there will be a maximum of 10% business use. The concession enables a building to meet the statutory condition of being used ‘solely for a relevant charitable purpose’ even with up to 10% business use.  From 1 July 2009, the term ‘solely’ will only be met where there is a maximum 5% business use.  On the upside, the new limit does not need HM Revenue & Customs' permission to be adopted, and charities will no longer need to use one of the three prescribed calculation methods – any reasonable calculation will now be accepted. HM Revenue & Customs have put in place a 12-month transitional period to 30 June 2010 allowing charities the option of using the outgoing concession instead of the new rules, but from 1 July 2010, everyone will have to comply with the 5% limit. Under the new regime, zero-rating will be by statute rather than concession, however, ‘change of use rules’ will apply, so HM Revenue & Customs will be expecting charities to do an annual check to ensure the 5% criterion is still being met. 

HMRC Perspective

According to a spokesman for HM Revenue & Customs, 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 HM Revenue & Customs 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 5-10% business use.

The Chief Executive of the Charity Finance Directors Group, Keith Hickey, 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 HM Revenue & Customs 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.”  

Method of Measuring the Extent of Business Use

HM Revenue & Customs will consider any method to be ‘fair and reasonable’ provided that it:

• accurately reflects the extent that the building is used for charity business and charity non-business purposes
• and its application should not be unduly burdensome for the charity and its accuracy should be relatively easy to check by HM Revenue & Customs

While there are methods prescribed in ESC 3.29, that is, time, floor space and headcount, it doesn't necessarily follow that these are always fair and reasonable. While this would not exclude charities from applying these methods, they must at all times consider whether they are fair and reasonable.

Withdrawal of Staff Hire Concession - Impact on Charities

This comes on top of the withdrawal of the staff hire concession in April which added significant costs to the employment of temporary staff by charities.

HM Revenue & Customs' original announcement of the withdrawal of the Staff Hire Concession came in the Budget 2008. The Staff Hire Concession was introduced in 1997 as a ‘temporary’ means of dealing with the distortion caused following the Reed Personnel Services case. However, such was the popularity of the concession amongst hirers of temporary staff that could not reclaim VAT, (e.g., charities, banks, care providers), that it lasted for 12 years. The concession worked by allowing temp agencies to only charge VAT on their margins, not on the wages and other statutory costs of the temporary staff. The withdrawal means that VAT is now due on the full hire charge, and increases the cost of hiring temporary staff in those sectors.