There are a number of valuable VAT reliefs for construction of buildings that are to be used for a ‘relevant charitable purpose’. Churches are one of the most frequent benefactors of these reliefs and VAT can be a significant proportion of project costings. Churches therefore need to be aware of the reliefs that are available and the limitations of those reliefs.
If your church is contemplating or even already undertaking a building project, competent professional advice could save you many thousands, and possibly hundreds of thousands, of pounds.
VAT and property is a very complex business. And the VAT liability can turn on very nuanced facts in each case. One area that is particularly vexing (and one that has led to a considerable number of cases before the courts and tribunals) is that of the construction of an extension or of an annexe to a church. What is the difference between the two you may say? The short answer is 20%! An independent annexe, even if attached to the original building, does not attract VAT, whereas an enlargement of an existing building does. That is easy to say but notoriously difficult to apply in practice.
The underlying VAT law is short on detail. We therefore have to look to court decisions for guidance as to how to interpret it.
HMRC has set down its views in its own guidance. Some of the distinguishing features are:
- Degree of affixation of the new building to the existing building;
- Access to and from the existing and new building, and whether or not there is an independent entrance to the new building;
- The activities undertaken by the charity in each of the existing and new buildings and a comparison before and after construction;
- Whether or not utility supplies are separately metered;
- Whether the new build has its own heating system or is dependent on, for example, a boiler in the existing building.
The difficulty that arises is that the courts do not always assent to HMRC’s approach. For example, HMRC states that (VAT Notice 708, para 3.2.7) an annexe should ‘provide extra space for activities which are distinct from but associated with the activities being carried out in the existing building’. Recent court and tribunal decisions have disapproved of this approach. Equally, the idea that an annexe cannot be served by a boiler situated in the old building has been put into question.
In conclusion, it is far from easy to determine when a construction qualifies as an annexe as distinct from an extension or enlargement. Competent professional VAT advice is needed and the earlier that this is sought, the better, as the tax professional is likely to need to liaise with architects and others involved in the project.
Stewardship will be very happy to point churches to an appropriate professional!