Charities benefit from a number of VAT reliefs, including the ability to disapply a seller/landlord’s option to tax on the sale of property or the grant of a lease, meaning no VAT is payable on the consideration. To do this, prior to completion a charity must notify the seller that they intend to use the property for a “relevant charitable purpose”. In Trustees of the Institute for Orthodox Christian Studies, Cambridge v HMRC (2015), the Tribunal considered whether a charity was able to disapply a seller’s option.
The Institute for Orthodox Christian Studies (IOCS), a registered charity, purchased a property in Cambridge with a view to developing it into a library and lecture and seminar rooms with accommodation for students.
The seller had exercised an option to tax but IOCS notified them they intended to use the property for a “relevant charitable purpose” and therefore did not pay VAT on the purchase price. IOCS did, however, provide the seller with an indemnity in the sale contract stating IOCS would bear the cost should any VAT be payable.
At the date of completion, various rooms at the property were subject to contracted out business tenancies, which were originally intended to terminate when they expired. However, IOCS later decided to renew some of the tenancies in order to raise additional funds for the development.
Subsequently, HMRC contested the disapplication of the seller’s option to tax on the basis that IOCS had put the property to business use. It therefore raised an assessment for VAT against the seller, triggering the indemnity clause in the sale contract.
The Tribunal held that IOCS was using the property in the course or furtherance of a business and therefore upheld HMRC’s VAT assessment. This decision was on the basis of (i) the nature of the courses IOCS provided in return for fees and (ii) the renting out of rooms at the property (albeit only temporarily), i.e. they found the use of the property was not for a relevant charitable purpose.
As this was a first tier Tribunal case, it may be appealed. However, as things stand, the result is potentially catastrophic for the charity. This demonstrates that it is vital that charities, when purchasing property or taking a lease, give a great deal of thought as to whether the intended use really is for a “relevant charitable purpose” and bear in mind that such use could well be scrutinised by HMRC.