Article by Sheilagh Pearce regarding VAT on buildings owned by the local community
Published in the February 2001 issue of "Tax Adviser"
Most villages, towns and cities have buildings that are used and owned by the local community. Many members of the public believe erroneously that there is no VAT on the construction or repair costs of a building that could be described as a village hall.
Completely new village halls
The construction of a completely new village hall is within the scope of Group 5 of the Zero-Rating schedule (Schedule 8) of VATA 1994.
If a village hall is rebuilt it is not ‘new’ for these purposes unless
a) the original building was demolished completely to ground level; or
b) all that remained before re-construction commenced was a single façade or a corner site, a double façade, which has to be retained because of planning restrictions.
It is a statutory condition that the relevant supplies may not be zero-rated unless a suitable certificate is given to the person concerned before the supplies are made. In practice Customs do not normally insist that the certificate should be provided in advance. Their guidance manuals state ‘relief should not be denied if, in genuine cases, such a certificate is issued belatedly’.
The necessary certificate must be as specified in Appendix A to VAT Notice 708.
Only a limited number of certificates should be issued. They may only be issued to those who make the zero-rated supplies. When there is a main contractor a certificate may be issued to that person but not to anyone to whom the main contractor may sub-contract work. Certificates should not be issued to those who may not zero-rate their supplies.
The supplies that may be zero-rated when all the necessary conditions are met are:
- the construction work;
· materials supplied by the person doing the construction work except for the specified exceptions; or
· the first grant of a major interest by the person constructing the building. Only materials ‘ordinarily incorporated by builders’ in village halls may be zero-rated. This does not include most pre-fabricated furniture, carpets and many electrical or gas appliances. These are excluded by statute (VATA 1994, Sch 8, Grp 5, Note 22).
Professional services of architects, surveyors and other consultants acting in a supervisory capacity are always standard rated. However, Customs accept that the design element of a ‘design and build’ contract may be zero-rated when the building work is itself zero-rated. This is explained in Section 10, VAT Notice 708 which also provides guidance on other situations where the contractual arrangements are for the supply of building work and some professional services.
New annexes
Adding an annex to an existing village hall is within the scope of the Zero Rating schedule when
a) it is used in particular way;
b) certain design features are met;
c) a certificate as mentioned above is provided to the person constructing the annex.
The zero-rate does not apply unless the annex is used as a ‘village hall or similarly’ or for another relevant charitable purpose.
The design features that must be met for the zero-rate to apply are:
i) the annex has to be capable of functioning independently from the existing building; and
ii) the only or main access to the annex must not be through the existing building;
iii) conversely the only or main access to the existing building must not be via the annex.
The work and materials that may be zero-rated are the same as for the construction of a completely new hall.
Mixed use
Use of the building or parts of the building for business purposes, or non-qualifying purposes, affects the zero-rating. The zero-rating will not apply if the building is used too greatly for purposes other than as a ‘village hall or similarly’.
Any particular part of the building that is not designed or intended to be used as a ‘village hall or similarly’ may not be zero-rated (unless covered by another zero-rating provision e.g. construction of a dwelling). In such circumstances the mandatory certificate must only relate to the parts used as a ‘village hall or similarly’ and the relevant supplies apportioned between the zero and standard rated elements (VATA 1994, Sch 8, Grp 5, Note 11).
If the business, or other non-qualifying, use, is less than 10 per cent it may be ignored. This usage must be quantified in a way which is acceptable to Customs. Customs are agreeable to be it being quantified by reference to the time that the building is used for business purposes, floor space or numbers of people using the building. Their full policy is in Business Brief 8/00 31 May 2000.
Zero rated alterations
‘Approved alterations’ to Grade 1 or Grade II listed village halls (or the equivalent in Scotland and Northern Ireland) may be zero-rated (VATA 1994 Sch 8 Group 6 Items 2 & 3). All the following conditions must apply for the work to be zero-rated –
a) listed building consent is required and granted before the work is done (retrospective consent is not sufficient);
b) the certificate described above is provided in advance to the person doing the work;
c) the work is not ‘ repair or maintenance’.
Commonly it is necessary to apportion building work that is both an ‘approved alteration’ and ‘repair or maintenance’. However it is not necessary to apportion when one is an integral or necessary part of another. It is not always easy to determine this.
Self-build groups
‘DIY’ groups constructing a completely new village hall, or another building if is used ‘similarly’ to a village hall, may claim the tax incurred on the construction materials from Customs after the building is completed (VATA 1994, s.35). Subject to complying with the necessary conditions, a claim may be made under the ‘VAT Refunds for ‘Do-it-yourself’ builders and Converters’ scheme. It seems that annexes meeting the conditions described above should also qualify for this scheme although the advice from one VAT Office is that they don’t!
Local authority owned halls
Local authorities are able to reclaim VAT incurred on work to village halls owned by them if:
a) the hall is used wholly for non-business purposes;
b) the local authority purchases the goods or services with its own funds or donations.
See VAT Information Sheet 1/99 February 1999 for more information about the application of VATA 1994, s. 35 to village halls and the like.
But … is it a ‘village hall or similar’?
In order for the building to benefit from the zero-rating facility it must be a ‘village hall or similar’. It must be run in a similar way; have similar facilities available; be for the benefit of the local community rather than for any profit motivated organisation.
Various cases have established the ground rules for such an enterprise.
Summary of case law
Ormiston Charitable Trust Ltd [1995] V & DR 180
The Ormiston Trust, a registered charity, built a Centre for sports based activities on land near a school.
Appeal dismissed.(1)The fact that the law stated ‘similarly’ was to be considered to be both limiting and qualifying the scope of the provision; there was a model against which the new construction should be examined.(2)The facility was not only used by the community local to the Centre. Many – about 80 per cent - of the children using the centre came from other areas of the city.
Jubilee Hall Recreation Centre v C & E Commrs and C & E Commrs v St Dunstan’s Educational Foundation. Court of Appeal 1998.[1999] BVC184
Jubilee Hall was a charity company limited by guarantee. The first floor of a listed building in Covent Garden was altered to enable it to be used as a sports facility. There was a café; self employed practitioners hired treatment and teaching areas; there was shop facility; the centre was available free of charge to some organisations; members paid to belong (with concessions for the Elderly, unemployed etc.) and non-members could pay an entrance fee to use the facilities. All profits were put to charitable purposes. Customs refused to allow the zero-rating of alterations to the building under VATA 1994, Sch 8, Group 6, item 2.Lottery funding was received by a fee-paying school to build a sports hall. The funding was conditional on the hall being available for community use. Agreement was reached with the local authority that local groups could use the facility as certain times.
Zero-rating of the alterations was not allowed.The benefit of the zero-rating facility should be to the final consumer – in this case the benefit was to the various commercial enterprises that used Jubilee Hall. As such it did not qualify under the legislation. Customs won. The building did not qualify for zero-rating. The sports hall was constructed primarily for the use of the fee-paying school. Any use by the community was secondary. Therefore it could not be said that it had been intended to provide solely ‘social or recreational facilities for a local community’.
The South Molton Swimming Pool Trustees 16495
The outdoor swimming pool was closed in 1991 and members of the public campaigned for a new pool. Local authority funding for such a project was not available. A Trust was established and lottery funding obtained. The Local Authority agreed to provide a grant to meet the shortfall in running costs of the project. A small cafeteria to be run by volunteers was included in the building.
The appeal failed. It was decided that supplies to the Trustees do not come within the normal meaning of ‘the final consumer’. However, the supplies to the Trustees were considered sufficiently close to the consumer to be of advantage to him (EC Commission v France Case 416/85 ) The pool was shown to be run in a business like manner with full-time employees and taxable supplies of refreshments, sports wear and equipment. It was shown that 20 per cent of the non-grant income was from the cafeteria and sale of sports wear. The Tribunal said this was not the type of activity of a ‘village hall’.Further the members of the public who used the facility came from a wide area – as far as 26 miles away. The Tribunal decided that the facility did not serve a ‘local community’.The Tribunal suggested that it was not the appearance of the building which had to be like a ‘village hall or similar’, but rather the use made of the building.
Ledbury Amateur Dramatic Society 16845
Ledbury Amateur Dramatic Society (LADS) needed a new theatre. They obtained the land and the necessary funding to construct a new building. Customs refused to allow zero-rating of the new building on the grounds that it did not conform to their idea of being a ‘village hall or similar’.The building was used, not only by LADS but also by other local organisations for meetings, fashion shows and other events.
The appeal succeeded.The Tribunal decided:The usage of the building was akin to that of a village hall – it even had the general appearance of a village hall. The building is sufficiently flexible to allow different uses, unlike South Molton Swimming Pool.The people who use the building and those who are likely to do so in the future come from the local community of Ledbury;The Trustees who ran the theatre were sufficiently close to the end consumer that any benefit would accrue to the final consumer.The enterprise was non-profitmaking. The only economic activities would be those run by members of the local community for fund raising for the theatre and for the benefit of the local community.
Planning points:
