Housing case highlights complicated charity VAT exemptions

Dec 9, 2015
Author: Paul Wormald
Paul is a partner at our Doncaster office. Paul specialises in advising small businesses and businesses in the transport & logistics sector. Paul also specialises in providing cloud accounting services to our clients.
charity's structure

VAT is a constant focus in the charity sector and presents a wide range of different challenges and issues for charitable organisations. The unique and valuable VAT reliefs that are available to charities are detailed and tightly defined, as a recent housing example has shown.

Charity faces ‘unexpected’ VAT bill of extra £1m

A London-based charity is facing an unexpected VAT bill of £1m, following a new development to provide “move-on flats” to homeless people. The charity had anticipated a VAT bill of £250,000, but this additional VAT – five times more than what was expected – has now put the future of the charity in jeopardy.

Reacting to the decision on the charity’s website Keith Fernett, the charity’s Chief Executive, commented: “HMRC’s application of VAT in this case is devastating to our work and to the vulnerable people we support. We believe we’re being unreasonably penalised for accurately describing our operations despite not changing what we do. We have worked incredibly hard to deliver a level of service with a reliance on donations and relatively little government funding. We hope HMRC will reverse its decision, and allow us to continue making a huge difference to people’s lives. Otherwise our work is at risk, and local authority services will be put under greater pressure.”

The full statement on the charity’s website here.

Charity VAT is one of the more complicated areas of VAT

Paul Wormald, Charity Partner at Hawsons, commented: “Although charities do have a unique tax status and gain through a number of attractive tax and VAT reliefs, it is still a common myth that charities don’t have to pay VAT at all. They do, and the rules around charity VAT exemptions are detailed and tightly defined. Charity VAT is actually one of the more complicated areas of VAT. This case is just another example of how minor changes can bring about big tax bills.”

One of the most important charity VAT exemptions, particular for those working in the housing sector, is undoubtedly on the construction of new buildings. A charity can have new buildings constructed at the VAT zero rate if they meet certain qualifying criteria. Usually this means that the building must be used for relevant charitable purposes…with no business activity being carried out; that also generally includes the charging of fees.”

In this case an adjustment in the charity’s description of services from a ‘homeless hostel’ to ‘residential and life skills’ is what brought about the additional VAT charge.

The charity is currently appealing the decision, which may well end up in court.

Paul added: “The charity VAT payable on the construction of new buildings is particularly complex and this case is not the only example of a charity facing unexpected tax bills. There have been a number of tribunals regarding charity VAT exemptions and VAT on new charity buildings in recent years. Just last year HMRC lost in its appeal over Longridge – a charity providing water-based activities on the VAT zero rating for a new building. Before that, Quarriers and Jeansfield Swifts, two other charities, have both won their cases to overturn the additional VAT at tribunal.”

“All of this creates ambiguity for charities and increases the cost of building new developments – even if the case is overturned at court – because of legal fees and postponements in development. Those other costs could account for £500,000 alone. That is vital funding that could be spent directly for the public benefit.”

“I would advise any charity to seek professional tax advice on the construction of new buildings before starting projects. Your VAT affairs are likely to be complex and professional advice could be the difference between an unexpected tax bill or a smooth development.”

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Paul Wormald is a partner at Hawsons, working in the Doncaster office. He worked previously with two national firms of Chartered Accountants prior to joining Hawsons in 2001. For more information or advice on anything covered in this article, please contact Paul on pw@hawsons.co.uk or 01302 367 262.[/author_info]