A recent First-tier Tribunal case has served up a painfully expensive VAT reminder about charitable use buildings (The Trustees of the Institute for Orthodox Christian Studies, Cambridge v HMRC).
Under VAT law, an option to tax can be disapplied if the purchaser of the relevant property confirms that it intends to use the property solely for “relevant charitable purposes” (RCP) and not as an office. RCP means use by a charity for non-business purposes or (less common in practice) as a village hall or similar local community use.
The appellant in this case was a religious charity seeking to purchase a new £800,000 base in central Cambridge. The seller was VAT registered and had opted to tax. The appellant was not VAT registered, but believed it could disapply the seller’s option to tax because of its proposed RCP use of the property. HM Revenue & Customs (HMRC) disagreed, and issued a VAT assessment to the seller (which the charity purchaser would be obliged to pay under the purchase contract).
Any VAT charged would not be recoverable as input tax, and the additional cost would (according to the evidence given) “most likely result in the collapse of the charity”.
The two key difficulties for the charity in this case were that:
- to meet overheads pending conversion works at the property, existing tenants were allowed to remain in the building for a short period, paying rent to the charity (rather than have the building empty); and
- it charged fees for courses and other facilities (albeit these were subsidised by both government grants and donations to the charity).
In both cases, the Tribunal held that these fell the wrong side of the line as regards the RCP test, and could not be regarded as non-business activities. Although the fees were at a lower level (because of the subsidies / donations) than might otherwise be the case for a commercial entity, that was not enough to make them non-business. The absence of a profit motive is only one of a number of factors taken into account in this analysis.
Accordingly, the option to tax made by the seller was not disapplied, and HMRC’s assessment of VAT was correct.
The business / non-business dividing line for charities is an area HMRC is exploring at present, and this Tribunal case is one of a number of recent decisions on this kind of point. A key case – Longridge on the Thames – is currently being appealed by HMRC to the Court of Appeal (the taxpayer having won in both the First-tier and Upper Tribunals). That case may become the benchmark for charities going forwards.