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VAT Zero rating of building work: the Capernwray decision

By Kevin Russell | 25 July 2014

zero rating of building work

In a case that recently went before the Courts, the First Tier Tribunal decided, amongst other things, that the activity of a Bible School was a business activity for VAT purposes. The case will be of interest to Christian charities as it potentially redefines advisors’ previous understanding of the law.


In the Capernwray Missionary Fellowship case [2014] UKFTT 626 (TC), it was decided that building works undertaken to construct a new Conference Hall could not be zero rated as the activities to be undertaken in the building would not constitute a ‘relevant charitable purpose’ (or ‘RCP’)’. In VAT law, RCP is specifically defined to exclude ‘business activities’. But was Capernwray undertaking business activities, so preventing VAT zero rating of the new build?


Capernwray is a Bible School, providing term time courses for Bible College Students and shorter courses for others, outside of term time. Activities include Christian worship.


The Court ruled that anything done for a fee, charge or similar will usually be considered to be a business activity even if fees are set at a charitable level - a fraction of an equivalent commercial rate. As such, it casts doubt on previous case law precedents on the subject.


For an activity to fall outside of ‘business activity’, the amounts charged would have to be substantially below market rate. By reference to EC v France 1/15th of market rents was given as an example of a case falling the other side of the line. Although, in this case, the activities were subsidised by donations, use of volunteers and so on, and the fees charged were well below those that a commercial organisation would charge, they were still set at a level calculated to cover costs. In this regard, the Court determined that they were set ‘on sound business principles’. The activity was also earnestly pursued, with continuity and substance. As such they met the criteria set down in a case called Lord Fisher  and, were therefore ‘business activities’ for VAT purposes.


It is also clear that it does not matter what the purpose is in carrying out the activity is. So charitable activity, even if run at a loss and perhaps subsidised from donations or grants, can still be a ‘business activity’ for VAT purposes.


Practical implications

Where a charity is carrying out actual or proposed activities in premises for consideration, they need to be aware of two things:


Liability for VAT on sales

If it is a business activity...

If it is a business activity, the charity may be liable to register for VAT purposes and to charge VAT at the appropriate rate on any charges. That VAT will then need to be accounted for to HMRC. This alone will reduce the income from that activity by up to 20/120ths (because the rate of VAT may be up to 20%).


Most churches will not have high enough sales from ‘taxable activities’ to trigger an obligation to register with HMRC, for VAT purposes. This aspect is therefore not considered further, here.

Loss of zero rating on construction costs

The second implication will apply, regardless of VAT registration status...

The second implication will apply, regardless of VAT registration status since a charity contemplating a large construction project will be keen to have the costs of the project zero rated. After all, paying 20% VAT on a large sum is … still a large sum!


If the church (or charity) wishes to build new premises, or an annexe, the construction costs of which may potentially qualify for zero rating for VAT purposes, it will need to satisfy itself that the intended use of the building will not only constitute a charitable purpose but that the activity or activities will not also be regarded as ‘business activities’, taking account of the rationale behind the Capenwray decision. Where part of the building is, and part is not used for a business activity, it is possible to apportion the building costs between the two and to zero rate the non business part.


The law here is quite complex to apply and therefore, appropriate professional advice is highly advisable especially given the sums usually involved in building projects.


Further comment:

The meaning of ‘business’ (or, to use the wording of the European Principle VAT Directive ‘economic activity’) has been interpreted both in the domestic and European Courts to include activities that the layman may not regard as ‘business’ - because the purpose of the activity concerned is not the generation of profit, and the activity may not be carried on in a commercial fashion. The court decisions have made it clear that interpretation is specific to the facts of each case. As such, it makes it difficult for professional advisors to bring certainty to every individual case. Nevertheless, the Capernwray decision is important in that it casts doubt on previous landmark decisions such as Yarburgh Childrens’ Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95.


As an aside, it was also held in Capernwray that the accommodation within the Conference Hall complex could not be considered to be a relevant residential purpose (RRP) – which also would have qualified for VAT zero rating, because the accommodation was used during holiday periods for those attending short courses and, in the circumstances, these people could not be ‘students’ within the meaning of the word, as used in the RRP rules.


Image by julian, used under a Creative Commons Licence

Posted by Kevin Russell

Our Legal Eagle guru and Stewardship's Technical Director, Kevin constantly has his finger on the pulse of all things tax and charity law-related. His briefing papers for charities, churches and individuals are an invaluable resource on everything from VAT to Gift Aid. 


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