Value Added Tax
Value Added Tax is a tax payable on supplies of goods or services.
- There is a general exemption for supplies of property (whether by sales and purchases or leases). However, this has very often been waived by the owner of the property in order to recover input tax on their surrender. Once the exemption has been waived so that the owner has opted to charge VAT, this cannot generally be revoked while the owner still holds the property.
- Some charities do make chargeable supplies of goods and services and can recover VAT, but most cannot. Therefore, the imposition of VAT on rents, or on top of the purchase price of a property can have a significant financial effect. Many letting or selling agents do not realise that this is an issue for charities, and do not highlight the fact that VAT will be charged on rent or on top of the purchase price when terms are being negotiated.
- There is no general property relief for charities from Value Added Tax. Charities that run operations from property regarded under VAT law as being a business (most situations where substantial funds are paid for services) or an administrative office will have to pay Value Added Tax on rent.
- Depending on whether there is non-business use for the purposes of the charity or the intended use of the property is similar to that of a village hall (broadly regarded by HMRC as community use effectively managed by the community), it may be possible to “disapply” the landlord’s decision to charge VAT.
- With regard to leases, you may elect to disapply a landlord’s election to charge VAT if you use if for a relevant charitable purpose but this must be 100% such usage (i.e. no administrative office use or use for a business purpose in VAT terms except that with the agreement of the landlord you can disregard 5% non-charitable use) A landlord’s election to charge VAT can also be disapplied with respect to separate parts of the building if they agree.
- In the case of a lease, you can disapply VAT on rent at any time if you are entitled to do so (including when the lease has already started). However, in relation to a property purchase, you have to notify the seller before exchange of contracts if you are going to disapply VAT.
- Where your property has been constructed with the benefit of zero rating for VAT purposes because it is to be used for a relevant charitable purpose, or as a village hall or similar, it is important to be aware that if it is no longer used in these ways within 10 years of completion, HMRC may claw back some of the VAT that would have been charged if the building was standard-rated.