If a new church hall qualifies as an independent annex the builder’s services are zero-rated, but if the work merely enlarges an existing church the costs are standard-rated. Neil Warren examines a case in which a Diocese won the argument against HMRC.
The case of Roman Catholic Diocese of Westminster v HMRC (TC06692) related to a new church hall built at St Joseph Church in Stevenage, linked to an existing church building. The issue in dispute was whether the new hall was:
- an ‘annex’, ie an independent building capable of functioning in its own right, separate to the existing church (VAT Notice 708, para 3.2.6); or
- an enlargement or extension to the existing church.
The Diocese (a charity) had assumed that a) applied and it was correct to issue a VAT certificate to the builder to confirm that this was the case. HMRC believed that b) applied, in which case the builder’s services would be standard rated.
There was no dispute about the qualifying use of the building. It was being used by a charity for a ‘relevant charitable purpose’, ie as a village hall or similar, or wholly for charitable (non-business) purposes.
The church building previously consisted of a place of worship and a hall, but after structural works were carried out a new hall was built, mainly on bare land, with 40 square metres of the building utilising land that was used for the previous hall. The new hall had its own access, separate to the main church building, as well as its own toilets and kitchen facilities.
If you have charity clients planning to carry out similar building projects, it is important to be aware of HMRC’s concerns:
No extra building
Before the remodelling of the church buildings was undertaken, the main building comprised a church and hall. This was also the case after the remodelling and the new hall was completed. An ‘annex’ should provide a different activity to the existing buildings.
The taxpayer claimed that the previous church hall was not used as a community building but was used as part of the church’s function as a place of worship. The new hall was very user friendly and could easily accommodate community use.
Use of existing space
One third of the new hall utilised land that was previously used for the old church hall.
The taxpayer said that the new church hall had been deliberately “designed and constructed so that it could be used independently from the main church building” and that “parishioners holding a meeting in the hall had no need to access the main church building.”
The tribunal allowed the appeal and looked at the building as it was before and after completion of the works, and concluded the structures were very different. The judge also said that the new hall met all of the qualifying conditions of an annex.
On a personal level, I have always found the decision about whether a new charitable building qualifies as an annex to be one of the most difficult issues in the VAT world. This is because the practical issues of constructing a new building sometimes override the perfect VAT outcome. In other words, an architect would like to design an annex that completely ticks all of the VAT boxes for zero-rating purposes, but there might be a land or planning issue which means things are not as clearcut as HMRC might like.
- Always focus on the approach of the judge, who I felt really cut through the finer detail and looked at the bigger picture. He said he examined “the physical characters of the building as it was, and as it is after completion of the works.”
- Ensure that the new building will function independently from existing buildings. The new church hall even had separate heating thermostats and boiler controls.
- Don’t be afraid to ask for a ruling from HMRC – the charity unit is much more accommodating in giving written VAT rulings than for a commercial business. There is an online form headed: “Charities and VAT – Enquiry form for Charities” which can be completed and submitted and then you get an email reply with a decision.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.