VAT blow to charities construction works

06 September 2016

David Wilson

UK charities seeking VAT relief on the construction of new buildings have been dealt a blow by a tax court.

The Court of Appeal has determined that, it is not a charity’s objectives which will determine if it is afforded VAT reliefs, but whether fees paid by users fall within the scope of VAT. 

Longridge on the Thames is a charity providing day and residential courses and activities related to water craft. 

Fees charged for this instruction, and the use of the facilities, were ‘subsidised’ to the extent that costs incurred by Longridge were mitigated by the amount of grants and donations received, and by the work undertaken by unpaid volunteers.

To qualify for the VAT zero-rated construction of new training facilities, Longridge had to satisfy the Court of Appeal that the building would be used ‘otherwise than in the course or furtherance of a business’.

The UK’s ‘business test’ for VAT purposes dates back to the early 1980’s case of Lord Fisher, and has been relied upon ever since by charities, and the VAT courts alike, to determine whether construction work could be afforded VAT relief. 

Applying the ‘Fisher tests’, the lower VAT courts found in favour of Longridge because, all other things considered, Longridge’s ‘predominant concern’ was the furtherance of its charitable objectives. 

The Court of Appeal has stated however that the historic ‘Fisher tests’ no longer reflect the jurisprudence of European VAT law, or the VAT decisions of the European Court.

The Court of Appeal is effectively stating that, in determining whether a charity’s activity falls within the scope of VAT, it is not the furtherance of a charity’s objectives that need to be assessed, but the activity generating the income.

Having determined that the subsidised fees paid to Longridge was a business activity falling with the scope of VAT, the charity was not afforded VAT relief in its construction of the new training facilities. 

As a result of this decision, Longridge now faces a VAT bill amounting to some £135,000.

Following the Brexit vote, there has been much speculation on whether the UK would still follow the jurisprudence of the European VAT law and the European VAT Court, or whether it would go its own way.

This decision, by a superior UK VAT court, has now however created a precedent in UK VAT case-law, and can now be relied upon by HMRC and other VAT tribunals to deny charities VAT reliefs.

If you would like any more information on this issue please contact David Wilson.