6.2 VAT and Church Buildings
VAT is a huge and complex area, and one that often changes as successive governments tinker with the nation’s finances. This article introduces the three major mechanisms by which building work need not incur VAT. It does no more than provide general principles relating to major projects. There are other more minor areas such as improvements for the disabled which may be relevant if you do not fall within any of the categories below.
1. Construction of a new church building.
Where a new church building is constructed, it qualifies for zero rating. The main contractor can zero rate his services of construction. This provides a major cash saving for the church undertaking the project. Zero rating will also extend to the demolition of any existing structures on the site. The church must provide an appropriate zero rating certificate to the main contractor to confirm eligibility for zero rating.
If any part of an existing building is retained, then zero rating may be lost. The church must take great care if Planning Permission requires the retention of, for example, one or more walls of an existing building.
If the church building is to be used for any business use, then that will affect zero rating. If business use is restricted to a specific part of the building, then zero rating cannot apply to that part. A café is one potential example of this, depending of course on how you set it up and intend to run it.
In contrast, if the whole building is to have mixed use, then zero rating will not apply. In such circumstance, consideration should be given to registration for VAT.
2. Listed Churches
It used to be the case that Approved Alterations to Listed Buildings were zero rated, but that all changed in the George Osborne’s 2012 Budget. After a lot of lobbying the Government relented (see blog post on Wakefield Cathedral) and extended the Listed Places of Worship Scheme (LPWS) which already covered repairs to include alteration works as well. Many historic church buildings have benefited from this scheme. At the time of writing, eligible claims were being paid in full, but there is no guarantee that this will continue.
In contrast with zero rating, claims under the LPWS can only be paid AFTER the works have been carried out. However, do note that multiple claims can be made in respect of the same development. Note that since October 2013 you can now claim for the VAT on professional fees also.
3. Construction of an ‘annexe’ to an existing building.
Zero rating applies to the construction of an annexe to an existing building. The distinction between an extension (on which you would pay VAT as normal) and an ‘annexe’ is often difficult to make, which of course makes financial planning difficult. To be classed as an ‘annexe’ your project would fulfil the following specific conditions:
- The annexe is to be used entirely for non-business purposes – so you need to think, for example, about your lettings policy;
- The purpose of such use must be distinct from, but related to, the use of the existing building – a good example is a church hall annexed to a church building;
- An annexe should be only partially integrated with the main building. A high degree of integration will militate against zero rating – so you need to think about how openings are dealt with between the new and the old parts;
- The existing building and the annexe must have separate entrances – they need to ‘read’ as two separate buildings; and
- The annexe must be capable of functioning separately from the existing building – in practice this means separate WCs and, if relevant, kitchens.
There is a lot of case law on this issue, and HMRC guidance leaves some room for confusion. It is important to seek clarity at an early stage before embarking on such a project.
If you want to grapple with the HMRC information relating to any of the above categories you need VAT Notice 708.
Becoming a Developer
Even if the building work is zero rated or the VAT can be reclaimed, the church will still pay VAT on professional fees; on a large project this is potentially many thousands of pounds. If your project is of sufficient size it is possible to mitigate the VAT on the professional fees by the church forming its own development company, to which the trustees award a “design & build” contract for the proposed works. Such a contract may be zero-rated on the whole of the cost including the professional fees. Of course you need to be aware of additional administrative and other costs associated with operating your own development company – as always take good advice and look at the bigger picture.
One point to note if you do go down this route: some items such as carpets, fridges, chairs etc will always incur VAT at the standard rate – this is because they are not deemed to be articles ordinarily installed by builders.
The small print
This article is a basic introduction to the main VAT issues affecting church buildings, and cannot be treated as a comprehensive treatment of VAT Regulations. It is recommended that full and professional advice be sought as early as possible in a project. You need to plan your VAT strategy from the outset – it is no good completing a project and then trying to claim the VAT back later. Getting this wrong can prove extremely expensive…
We are grateful to two VAT specialists for their help in writing this article: Les Howard of vatadvice.org (01223 628733), and Alan Rashleigh (01625 850642).