Should VAT on community centres be zero-rated?

HMRC has issued an update to its guidance on when new sports pavilions, community sports centres, community centres, church halls etc can qualify for zero rating. This reflects the outcome of several cases on this issue over the last few years.

What is the issue?

VAT legislation provides that zero-rating applies to the construction or first sale of a building or part of a building where it is to be used solely for a relevant charitable purpose. One of the definitions of a ‘relevant charitable purpose’ is use by a charity ‘as a village hall or similarly in providing social or recreational facilities for a local community’.

In recent years, sports and other clubs have sought to apply this treatment to their new buildings. HMRC has challenged several of these situations with cases reaching the courts.  There have been wins on both sides but HMRC’s updated guidance does tend to reflect more the cases they have won.

Charity Status

Firstly, in order to obtain zero-rating, the building has to be used by a charity. Many sports clubs have been constituted instead as Community Amateur Sports Clubs (CASCs). Attempts to treat these as charities for the purposes of the VAT reliefs have failed and the new guidance confirms that CASCs and other non-charities cannot benefit from zero-rating under this heading.

Use of the building

The fundamental principle that a village hall is run by the community and for the community remains. Whilst the condition that the charity should have representatives from various users of the facility on management committee has been removed, HMRC still expect to see the following for the building to qualify:

• use by a diverse group of users of the new building rather use by only a particular sports club
• charges for use will be fairly low and that the whole enterprise will be run on a non-commercial basis
• bookings should be made on a first-come-first-served basis
• users of the hall do not have to be exclusively from the local community but it is expected that this will often be the case.  Where there are no similar facilities in the area we expect the definition of ‘local community’ to be more far reaching.

In practice, these conditions are likely to reflect how most charities were planning to operate their new facility anyway.

However, a sports charity will typically have built its new facility with its own use foremost in its mind and where this is the case we expect village hall treatment will continue to be an area of contention.

Design of the building

HMRC confirm that a building cannot qualify if it is mostly used for storage, or where there are parts of the building that are not used for recreational or social activities. Typically canoeing, rowing and sailing clubs, where much of the building is racking for boats, are unlikely to qualify.

However, zero-rating could still apply to the non-storage part if this could be a community facility in its own right.

Where does this leave us?

Most of us will have a fairly clear concept of a traditional village hall, used by a variety of local groups and run by a community of local volunteers. However, most of the community buildings constructed in recent times do not fall neatly into that category, and the question has become whether they are similar enough to qualify for the VAT relief.

With the availability of funding for new sports facilities, several new buildings have been constructed. The primary purpose of these is clearly as a sports club, but many will have a secondary role in acting in the same way as a traditional village hall. HMRC’s guidance does go some way in acknowledging how recent case law has looked at the use as a whole and concluded such a building can qualify for zero-rating but this is still an area of ambiguity.

Importance?

Fundraising for new facilities is challenging at the best of times; but the potential addition of 20% VAT to costs means that it is invariably worthwhile obtaining advice at an early stage if you are looking to construct a new building and think it may qualify for zero-rating under this heading. Furthermore, given that incorrectly signing a certificate can lead to penalties of 100% of the tax due it is important that that this is given full consideration.

For more information on this matter or to discuss any of the points highlighted in this article, please contact [email protected] or your usual Crowe contact.