The UK tax authority, HM Revenue and Customs (HMRC), has announced changes
to the application of the zero-rate to new buildings used for a relevant charitable
or residential use.
On July 1, HMRC released a brief to explain the changes to the VAT treatment
of new buildings, and the withdrawal of Extra Statutory Concession (ESC) 3.29
and two related concessions.
Under UK tax law, a building intended to be used solely for a relevant charitable
purpose (non-business use) can be zero-rated if the charity provides their developer
with an appropriate certificate before the first supply is made.
If, however, the building is put to a business use within ten years of the
building’s completion, VAT must be paid to reflect that the building has
ceased to be eligible to benefit from the zero-rate (known as a ‘change
of use charge’).
Under Extra Statutory Concession 3.29, HMRC has permitted zero-rating where
a building was used 90% or more for a relevant charitable use. No change of
use charge arises in a case where a building ceases to be eligible if it was
zero rated only as a result of the application of this concession.
The two related concessions, the ‘switching areas’ concession
(where the overall use of the building was unchanged) and the ‘look through’
concession, (where the occupiers’ use of the building was for a relevant
charitable purpose) enabled some business use of a building to be disregarded.
However, having considered appropriate court decisions, HMRC now recognizes
that the term ‘solely’, as used in the phrase 'solely for a relevant
residential or relevant charitable purpose', can incorporate an appropriate
de minimis margin.
In order to avoid unnecessary disputes in marginal cases, HMRC says it will
accept that this statutory condition is satisfied if the relevant use of the
building by the charity is 95% or more.
“In the light of this change of view, the ESC is no longer considered
to be necessary or appropriate,” HMRC stated. “It will therefore
be withdrawn, subject to a 12 month transitional period.”
A person can now rely on this revised interpretation of ‘solely’
that is, 95% or more, to determine whether a building will be eligible for the
zero rate or not.
“For this purpose, use for a relevant charitable purpose does not have
to be calculated using one of the three methods described in ESC 3.29,”
the department explained. “Any method may be used to calculate the qualifying
use of the building, so long as it is fair and reasonable.”
HMRC added that prior approval for any method of calculation is not required.
But if a building is zero rated as a result of applying this new interpretation,
there will be a change of use charge if it ceases to be eligible within ten
years of the buildings completion.
The department confirmed that ESC 3.29 and the two connected concessions will
now be withdrawn, subject to the one-year transitional period which started
on July 1, 2009. During this transitional period, charities will be able to
continue to apply ESC 3.29, or choose to apply the revised interpretation of
the newly-announced statutory provision.
The meaning of the term 'solely' will depend on the legal context in which
it occurs and on the nature of the underlying transactions to which any particular
piece of legislation is directed, HMRC stated.
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