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HMRC have decided to withdraw extra-statutory concession (ESC) 3.29.
The ESC allows a new building either bought or constructed by a charity to qualify for a zero VAT rating on the cost of the building or works as long as less than 10% of the construction is used for business activities.
The phrase ‘relevant charitable purpose’ is linked to the non-business objectives of a charity: for instance, a place of worship.
The Revenue now considers that statutory law allows a small amount of business use within the definition of ‘solely for a relevant charitable purpose’ and the department has deemed this limit to be 5%.
However, HMRC have decided to allow a transition period of 12 months, until 30 June 2010, where either the old ESC 3.29 or new interpretation based on statutory law can be adopted by a charity, subject to various conditions that are explained in para (4) of VAT Info Sheet 39/09.
Independent VAT consultant Neil Warren highlighted two important changes with the new approach: ‘The concession gives three alternative methods of working out the percentage of business use, based on time, floor space or headcount.
'The statutory approach allows any method to be used, as long as it is fair and reasonable. This is good news and gives increased flexibility in the methods of calculation that can be adopted.
'However, the new rules mean a change of use charge will be applied against the charity if the 5% limit is exceeded within ten years of the building being completed. This condition needs to be carefully monitored on an annual basis,' added Mr Warren.
Queries on the revised policy can be directed to HMRC’s charity helpline: 0845 302 0203.
