Download VAT: HMRC Interpretation of “solely”

VAT: HMRC Interpretation of “solely”
Background
Zero rating of construction costs is available where a new building is intended to
be used “solely” for certain purposes. In July 2009 HMRC issued two statements
clarifying how it intended to interpret this word, and in an allied move gave notice
of the withdrawal of an extra statutory concession relating to charities. These
statements are of considerable significance to some charities and schools.
Overview
Many businesses can recover VAT charged to them on their costs, including the
capital costs relating to new buildings. Apart from the cash flow implications, there
is no final cost to these types of business of paying VAT on construction costs.
By contrast, private individuals, and many charities and organisations involved in
education and welfare, have no means of recovering VAT charged to them. They
are either not in business, or they do not charge VAT on any business income, and
so are not entitled to recover VAT charged to them on their costs. However, the
VAT rules offer some alleviation by allowing building costs (but not associated
professional fees) to be zero rated, rather than bearing the normal standard rate of
VAT. For instance, this applies to the building costs of new domestic
accommodation such as houses and flats.
There are two other main situations where zero rating applies. These are where the
new building is intended for use “solely” for what are termed:a relevant charitable purpose, or
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a relevant residential purpose.
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A relevant charitable purpose means non business use of a building, although use
as a village hall or similar is permitted. Business is widely defined for VAT
purposes and would include say the provision of education by a charitable school
and the provision of rented accommodation by a charitable registered social
landlord. By contrast the provision of say free emergency assistance to the
homeless would not be a business activity.
A relevant residential purpose broadly means accommodation used as a
communal dwelling. For instance this covers:Residential accommodation for students and school pupils.
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Children’s home, old people’s home, and accommodation for those in need
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of care.
Monastery, nunnery etc.
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Hotels and similar establishments, as well as hospitals and prisons, are excluded
from zero-rating. The rules make appropriate provision for apportionments where
different buildings are being constructed at the same time.
Requirement for sole intention/
intention
“inform” is designed to give a brief summary of relevant rules, as known at the date of issue. Chiene & Tait can accept no responsibility for any loss
arising to any person acting or refraining from action as a result of this “inform”. Advice should be sought in relation to individual circumstances. ©
Chiene & Tait CA.
Chiene & Tait CA 61 Dublin Street Edinburgh EH3 6NL Telephone 0131 558 5800. Fax 0131 558 5899. Web:www.chiene.co.uk. Registered to carry on
audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants of Scotland.
Requirement for sole intention
The requirement that the building is intended for use solely for relevant charitable
or residential purposes can cause practical difficulties. For example, a school
might primarily intend that a new residential block is used for school and other non
school educational purposes, but also intend that it should be used in the summer
holidays for visitors.
Some points to note are:The requirement for sole intention is either met or not. For instance if say
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70% of the intended use were for purposes meeting the rules, there would
be no zero rating, as opposed to zero rating of 70% of the building costs.
Universities and higher education colleges, but not schools, can benefit from
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a relaxation of these rules in connection with non term time provision of
student accommodation.
HMRC interpretation of “solely”
In their Brief 39/2009, HMRC announced that the term “solely” can allow for an
appropriate margin, measured at 5%. Accordingly, zero rating will be applicable
if 95% of the intended use satisfies the relevant conditions.
Some points to note are:There is no fixed method for calculating the use of the building for the 5%
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de minimis limit. In Information Sheet 8/2009, HMRC say that they will
accept any method that is “fair and reasonable”.
HMRC have stated that they will accept any method to be fair and
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reasonable provided that:it accurately reflects the extent of the two types of use, and
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its application is not unduly burdensome and its accuracy is relatively
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easy for HMRC to check.
Charity concession and its withdrawal
Under an extra statutory concession applying to relevant charitable (but to not
relevant residential) use HMRC had previously allowed a de minimis limit of 10% in
applying the solely test, with specified ways of measuring the use. Subject to a
transitional period lasting to 1 July 2010, this concession has now been withdrawn.
Points to note include:Charities may immediately apply the new 5% de minimis limit.
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The transitional rule is in recognition of the planning that may have already
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gone into future buildings. HMRC have indicated that there must be a
meaningful start to construction services by 30 June 2010 for those charities
seeking to qualify under the concession. For instance, demolition or site
clearance works would not be eligible for zero rating unless the construction
started immediately afterwards.
If a charity uses the concession it must apply one of the three measures
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specified, namely time, floor space or headcount.
Use//
Change of Use
Change of Use
There are separate VAT rules applying to situations where the initial intention met
the requirements but there was a change of use within the following ten years. The
change of use provisions can entail either a claw back of some of the benefit of
zero rating, or the standard rating of supplies that might otherwise have been
exempt.
If the actual use of the building is within the 5% de minimis, no VAT issues arise.
If, however, the 5% limit is in practice breached, then these change of use
provisions need to be considered.
Where a charity has taken advantage of the concession to allow 10% of a
building’s use to be for a non qualifying purpose, the question may arise as to
whether 10% will continue to be the relevant threshold when considering a change
of use. HMRC have said that they “would expect the use of buildings to be
reviewed at least once per year and the method should normally be the same as
the one that originally secured the zero rating.” In the absence of express
comment from HMRC, it may reasonably be inferred that in such cases the 10%
threshold will continue to apply for the ten year period following construction.
Summary
HMRC’s two announcements in July 2009 are important for those planning certain
building projects. The introduction of a 5% de minimis should allow some leeway
for schools planning new boarding houses, but the withdrawal of the extra
statutory concession will require some charities to plan the likely use of new
buildings with even greater care.
October 2009
“inform” is designed to give a brief summary of relevant rules, as known at the date of issue. Chiene + Tait can
accept no responsibility for any loss arising to any person acting or refraining from action as a result of this
“inform”. Advice should be sought in relation to individual circumstances. © Chiene + Tait CA.
Chiene + Tait CA 61 Dublin Street Edinburgh EH3 6NL Telephone 0131 558 5800. Fax 0131 558 5899.
Web:www.chiene.co.uk. Registered to carry on audit work and regulated for a range of investment business
activities by the Institute of Chartered Accountants of Scotland.