One of the most costly items for any organisation is property.
The rules concerning the purchase, construction or development of land and property are complex. It is recommended that professional advice is always sought, and as early as possible. It may be that the VAT consequences of the proposed project will have a significant effect on its viability.
VAT Law provides that the freehold sale of a new building to a charity for ‘relevant charitable purpose’ is zero rated. This relieves the vendor, and therefore the charity, of the VAT cost of its construction. This is, of course, good news. However, conditions do apply, and must be fulfilled.
VAT on Property Development – Existing Building
Where a charity seeks to develop an existing building, then that work will be standard rated.
Works required to fulfil the Disability Discrimination Act can be zero rated; and installation of energy saving equipment can be charged at the reduced (5%) rate. Again, conditions apply to such works, however, they can present cost savings to a project.
Charity and Business
Where the charity engages in business activity, then that has certain implications for property development.
Where a charity is seeking to benefit from zero rating, business activity can jeopardise the zero rating.
Where a charity is undertaking standard rated work, its business activity can mean that it seek registration for VAT, and therefore recover some of the VAT charged on the development.
A further complication can arise where the activities of the charity change. In certain circumstances, the original VAT liability may need to be re-visited.
For example, where a charity has benefited from the zero rating to a new building, as described above; and, within ten years of Completion, it commences business activities, a VAT charge will apply. (This can, and should, be planned for, to mitigate its impact).
Whatever decisions are made with respect to property development, it is recommended that a written note be retained for the benefit of the Trustees.