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Glasgow
+44 (0)141 221 2984

Edinburgh
+44 (0)131 225 6366

Stirling
+44 (0)1786 451745

Dumbarton
+44 (0)1389 765238

Hamilton
+44 (0)1698 459444

French Duncan

VAT ALERT - Charity loses VAT case

08 September 2016

A charity built a new commercial property and incurred VAT on the construction costs.  It believed VAT should not have been charged, based on its non-business use of the building.

Background

The charity, Longridge on the Thames, built a new training centre to provide water based and other outdoor activities as well as providing instruction and training in the activities. The VAT cost for construction was £135,000. The charity is not VAT registered and considered that the fees received for instruction and training (which were well below cost) should be classed as non-business income. This would permit the construction services for the building to be zero rated.  HMRC challenged this and stated that Longridge was “in business” even if the charges for services were below cost.  On this basis the building services were subject to VAT at 20%.  The charity took its case to Tribunal and won the first two Tribunal hearings, but has now lost at the Court of Appeal.

Who does this affect?

This could affect any charity involved in the construction of a new facility/HQ where non business income is involved.  As this case has been ongoing for some years, it is possible that some charities relied on the original decision to claim zero rating on a new commercial building.

Builders who constructed such properties will be the party that HMRC assess (plus penalties and interest) as it is the supplier who has the responsibility for getting the VAT treatment correct.

Action

Any builder that constructed a commercial building for a charity may now be open to a VAT charge. If HMRC visit the builder and assess for VAT uncharged, the builder will be required to pay the VAT due and any penalties and interest added.  If the contract with the charity is deemed “full and final”, the builder has no recourse and will have to incur the cost.  If the contract is silent on VAT or states it is “VAT exclusive”, it is possible that the builder could go back to the charity to recoup the extra 20% now deemed due.

Both charities and construction clients involved in such projects over the past 4 years might find they need to check the legal terms of historic contracts to clarify their positon to be prepared for the VAT treatment to be questioned, in advance of any potential HMRC inspection.

If you have any queries or concerns please contact our VAT Senior Manager, Maria McConnell, by email to m.mcconnell@frenchduncan.co.uk or call 0141 221 2984.