News

VAT & buildings: ESC3.29 to be withdrawn - 2009-09-22

HMRC'S Extra Statutory Concession (ESC) 3.29, which allows the purchase or construction of buildings used for 90% charitable purposes to be zero-rated, will be withdrawn from 1 July 2010.  Two related concessions, the 'switching areas' concession and the 'look through' concession, which enabled some business use of a building to be disregarded, will also be withdrawn.

Following a review of the issue and recent Court decisions, HMRC now takes the view that charities must meet the statutory position which is that the building must be used 95% or more for a charitable purpose to be zero-rated.  The good news is that HMRC will allow charities to use any method to measure this, providing it is fair and reasonable.  If, however, your qualifying use falls below 95%, HMRC will claw back the tax.

There will be a 12 month transitional period from 1 July 2009 in which charities can choose either to continue to apply ESC 3.29 or to apply the revised legislative interpretation.

However, charities opting for ESC 3.29 but with relevant use of 95% or more, will be bound by the legislative interpretation for change of use purposes.  You will not be able to rely on the ESC "90%" rule if qualifying use falls below 95% in the first 10 years.  If a building is zero-rated as a result of applying the new rules, there will be a change of use charge if it ceases to be eligible within 10 years.  HMRC will expect the use of buildings to be reviewed at least once a year.

With the withdrawal of the 90% concession, many charities will no longer be able to recover all of the VAT they are charged on buildings.  This is a blow for charities as it will give rise to a great increase in costs and could make many projects unfeasible.  Nevertheless, there could be opportunities for charities who did not meet the 90% charitable use test under the old rules but who may pass the 95% test now by using another method of calculation..  It is therefore all the more important that charities seek professional advice in order to mitigate any potential VAT exposure.

For advice contact VAT Partner, Bob Jones on 020 75162295 or email rjones@littlejohnllp.com