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To pay or not to pay? VAT is the question!

Photo of Kevin Russell Kevin Russell
4 min

At Stewardship, we are often asked questions like “Should our church register for VAT” or “Can our church reclaim VAT”. Both questions point to a similar answer. Churches in the main do not usually make supplies (i.e. sell anything) that is subject to VAT. That means that they cannot generally register for VAT, nor can they reclaim VAT paid through the VAT system. The best approach then, is (legally) not to incur it in the first place!

This blog focusses on an area that many churches needlessly pay VAT – when renting premises for church activities.

Rents may be paid for space in schools, leisure centres, and the like for Sunday worship, mission events, outreach events, and so on. More often than not, those renting the premises to the church will add 20% VAT to the rent and think that they are right in doing so. Indeed, their advisors may back them. So what does the law actually say?

Stage 1 – the rent is exempt from VAT
Where a church rents space in someone else’s building, for example for Sunday morning services, that will normally be VAT exempt. So far so good. No VAT to pay.

Stage 2 – the landlord may have ‘opted to tax’ the building
Not so good! The landlord has what is called a legal option to tax the rent so that they can add VAT at 20%. Landlords will often want to exercise this option as it will improve their own VAT position and enable them to recover more VAT on their own costs. Obviously, that doesn’t help a church as they will not usually be able to reclaim anything.

But here comes the good bit:

Stage 3 – churches are ‘immune’ from the option to tax!
If the church rents space purely to carry out non business charitable activities, they have a legal right to block the landlord’s option to tax, meaning that it must stay VAT exempt (Stage 1). Landlords will often not know this. So it is up to the church to point it out and then convince them that they can’t charge you VAT.

Example: if you rent space in the local leisure centre to ‘do church’ on a Sunday morning that will be a non business activity and the owners of the leisure centre should not charge VAT. If they do, you can stop them.
So, what’s the procedure for getting out of the VAT charge?

HMRC recommend that you provide the landlord with a VAT certificate that says that you will use the accommodation being rented solely for what is called a ‘relevant charitable purpose’. Stewardship has produced a briefing paper for churches renting property for their activities and this gives more detail of the meaning of ‘relevant charitable purpose’, as well as providing you with a template certificate.

Normally, the landlord will need advance notice of your intended use, and you can give this using the certificate. But you may be able to convince them to issue a VAT only credit note for rents paid over the previous four years if they have incorrectly charged you VAT.

There are two points to be aware of:

  1. If you are renting premises and what you do there includes ‘business’ activities, VAT can still be charged. For example; if a church rents premises to run a bookshop, or runs an even with an entrance fee, this is likely to be business use. It may raise funds but that is irrelevant. Equally; whether or not a profit is made is irrelevant for VAT purposes, the rent will attract a VAT charge if the property owner has opted to tax it.
  2. If the payment made is buying a range of additional services alongside just a room, for example; the ‘rent’ includes provision of AV equipment, catering etc., the payments may not be rental payments at all, but payments for a package of services including the room. If this is the case, VAT is charged at 20% regardless. Our briefing paper provides a potential way around this.

If your church is paying VAT on renting accommodation, it is probably time to review the arrangements and see if you can have the VAT charges removed.

For more help, see our briefing paper:

_VAT: churches renting property for their activities

We also publish a more comprehensive guide on VAT for churches that covers anything from promotional flyers to purchase and construction of buildings. This is available from our online shop:

VAT for Churches

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Written by

Kevin Russell

Kevin is one of Stewardship’s leading team of technical experts with over 25 years of experience of helping churches and Christian charities maximise their potential. His expertise and knowledge is sought not only by charitable organisations but by Government, the Charity Commission and HMRC, helping to solve complex tax and charity law problems.

Prior to working for Stewardship, Kevin had a wide range of business, charity and teaching experience and is a qualified chartered accountant, and a chartered tax advisor. At PwC he was a Senior Tax Consultant assisting medium and large businesses in all aspects of their tax affairs. Also a lecturer in the Business School at Middlesex University and Principal of his own Chartered Accountancy practice.

Kevin is Vice Chair of the Charity Tax Group and Chair of CTG’s Gift Aid & Giving Technical Group. He represents the Christian church on HMRC’s Charity Tax Forum and advocate for the sector to Government, the Charity Commission and HMRC.

Currently a trustee of the UK arm of an international charity that inspires people to discover Jesus for themselves. Past roles include church deacon, trustee and auditor and he has helped set up two church plants.

Kevin and his wife Carol have 3 adult children and one grandchild.  They attend Grace Church, Highlands in North London.

Causes close to Kevin and Carol’s hearts are those working directly with the homeless, with drug addicts, and women in prostitution. Organisations working in evangelism amongst young people, in family life and demonstrating Christian love in action in the public sphere.

 

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