Minimising VAT on construction
Charities generally cannot recover VAT on their purchases and therefore, when constructing a new building, they will seek to minimise the VAT charged.
The main legislation for zero-rating the construction of a property for a charity is Item 2 and Note 6, Group 5, Schedule 8, VAT Act 1994. The zero-rating applies to the construction of buildings which are intended to be used solely for a relevant charitable purpose.
Difficulties tend to arise when considering whether a particular building is intended to be used for a relevant charitable purpose and HMRC often challenges the interpretations used by the taxpayer.
On 5 August 2016, a decision was released in the case of Caithness Rugby Football Club v Revenue and Customs Commissioners  UKFTT 0378 (TC). The taxpayer was a rugby club which was constructing a club house on its sports ground. The rugby club was a charity and, after the club house was constructed, charged others for its use 90% of the time, but did not pay to use the building itself.
In its decision, the Tribunal identified a number of tests which should be met before zero-rating legislation could be applied. Contrary to HMRC’s position, the Tribunal took the view that the club house was intended to be provided to a sufficiently local community for qualifying recreational use and on a non-commercial basis. It was not decisive that one of the groups, rather than the local community as a whole, managed the building and did not pay when it used the building.
This is a useful bench mark for determining whether the construction of a building qualifies for zero-rating when purchased by a charity. Those charities which cannot fully recover the input tax should be reviewing whether the charge to VAT on construction should be (or should have been) zero-rated. Constructors should also be prepared to respond to queries raised by charitable customers and review the VAT position. Amendments can be made for the past four years, and therefore past projects should be reviewed in addition to current and future contracts.