Just over a year ago, HMRC announced that the charitable buildings concession (Extra Statutory Concession 3.29, effectively ignoring for zero rating purposes up to 10 per cent non-qualifying use of a relevant building based on time, floor space or head-count) would be withdrawn on 1 July 2010.
This was because HMRC accept that a nominal amount of non-qualifying use of a relevant building (up to 5%) does not affect the definition of ’solely’ in statute law, so the ESC was no longer needed.
HMRC have recently issued two Revenue and Customs Briefs on the subject (Nos 26/10 and 32/10) and an Information Sheet ‘Calculating qualifying use for a charitable or a communal residential building’ (No. 13/10) to remind affected businesses of the changes and explain various ways they can demonstrate that a relevant building will be used more than 95% for a qualifying purpose.
It is still possible for some affected charities to take advantage of the former concession, provided that the appropriate certificate was issued before 1 July 2010 and, by 1 January 2011, either: the building is constructed above foundation level, or the charity is occupying the building if it has acquired or leased it
From 1 July, charities and those who intend to use buildings solely for a relevant residential purpose must be able to demonstrate an acceptable basis on which they have calculated that the building will be used at least 95 per cent for a qualifying purpose. Information sheet 13/10 is particularly helpful in that it is the result of consultation with representative bodies, such as the Charity Taxation Group and the Charity Finance Directors’ Group, and provides a number of examples of how the bases used under the former ESC, and other bases, can be combined in a fair method. HMRC no longer need to approve methods but they are willing to express a view on the fairness of a method.
However, as usual, the changes come with words of warning:
the ’switching areas’ (where the overall use of the building is unchanged) and ‘look through’ (where the occupier, who is not the charity constructing, uses the building for a qualifying purpose) concessions have also been withdrawn;
whereas the change of use provisions did not apply where the former concession was used, they will now apply where zero rating has been applied on the statutory basis from 1 July 2010;
this interpretation of ’solely’ i.e. ignoring up to 5 per cent non-qualifying use, only applies to this provision and not other areas of VAT law.
Charities and all other affected business should ensure they understand the concept of ‘use’ of a building and plan as carefully as possible at the planning stage to ensure they have explored all possible justifications for at least 95 per cent qualifying use.