Knowledge Hub

Tax and VAT Governance, legal and compliance Accounting and reporting

Property development for charities

Following on from CFG's popular VAT and Tax Conference in July, Socrates Socratous from Buzzacott outlines the VAT implications for different types of property use and development.



Any charity contemplating the development of a property has a number of VAT issues to consider to mitigate the potential VAT cost of the project. This article considers these, as well as the requirement to monitor the ongoing use of the building.


1. Property acquisition

The starting point is to consider whether VAT should in incurred in the first place.

If a charity is acquiring an interest in a building, the first question to consider is whether the vendor has exercised the option to tax (OTT) the building and intends to charge VAT. Many charities are unable to pay the VAT they incur, so a VAT charge will add substantially to the cost of the project.

A vendor’s OTT can be ‘disapplied’ if a charity intends to use the building solely for a relevant charitable purpose (RCP). Broadly, this means either for use by a charity for a non-business purpose (not as offices), as a village hall, or similarly in providing social or recreational facilities for a local community. HMRC’s general guidance on the meaning of ‘business’ can be found in HMRC Notice 701/1.

There is no specific certificate to disapply the vendor’s OTT, but the vendor must be notified of intended use before the supply (date of completion or payment of a deposit) is made. The downside for the vendor is the impact on VAT recovery, and hence this should be discussed between the parties.


2. Transfer of a going concern

If the property acquired has existing tenants, the transaction may qualify as the transfer of a property letting business (TOGC) for VAT purposes.

In such cases, the sale is outside the scope of VAT even if the vendor has opted to tax. The benefit is the saving of both VAT and Stamp Duty Land Tax (SDLT) costs. There are conditions to be met for TOGC to apply, and these will need to be considered.


3. Property development

(a) Construction services – new build

If the charity is refurbishing a newly acquired property, then aside from some zero-rate reliefs associated with assisting the disabled, most of the works will be subject to VAT.

However, if a charity plans to construct a new building, the construction services will be zero-rated, provided that the building or defined parts are used solely for a RCP.

In such a case, it is necessary to consider the entire use of the building, as in most cases, there is likely to be mixed-use. Typical uses and the resultant VAT liability of the construction services are:

  • use for RCP – construction services zero-rated;
  • use by the charity for trading – construction services standard-rated;
  • use by a third-party charity as a tenant–construction services standard or zero-rated (depending on any RCP use); or
  • use by a commercial tenant – construction services standard-rated.

Before the contractor can zero-rate his services, the charity must issue a zero-rate certificate, certifying its intended use for the next ten years.

(b) Construction services – annexes

Works of conversion, enlargement or extension to an existing building will always be standard-rated. However, the construction of a charity annexe can be zero-rated, subject to certain conditions. The critical tests are whether the annexe has its own independent main entrance and whether it can function independently of the existing building.

(c) Professional services

Professional services, e.g. of architects or quantity surveyors, are standard-rated. However, it is possible (where construction services are zero-rated) to set up a design and build (D&B) structure so that the VAT liability of the professional services follows that of the construction services.

HMRC Notice 708 para 3.4 gives guidance on the use of this structure. However, there are a number of practical issues to consider, including setting up and funding a subsidiary company to act in a D&B capacity.


4. Points to consider during construction

With a mixed-use development, VAT will be incurred, and therefore a charity needs to determine the extent of VAT recovery. Some points to consider include:

(a) The option to tax

If a lease is granted to a third-party, the option to tax makes the rent subject to VAT and hence allows VAT recovery. This is unlikely to be a problem for commercial tenants (unless they're partly exempt), but if the tenant is a charity, it may not want the VAT charge or may seek to disapply the OTT as outlined in section 1.

(b) Zero-rate leases

If a tenant is a charity using the building for a RCP, the grant of a lease greater than 21 years will be zero-rated. This again allows for VAT recovery on any associated costs.

If it is known at the outset that a tenant charity will be using part of the building for RCP use, then the construction services for that part of the building might also be zero-rated.

(c) Own use

The constructing charity may need to set up a trading subsidiary to undertake some of its proposed trading activities. It should consider whether a VAT group with the subsidiary would be advantageous.

(d) VAT recovery

If the charity has a mixture of business (taxable and exempt) and non-business activities, it will need to consider a VAT recovery method. In some cases, it can be advantageous to seek a sectorised calculation based on the use of the building.


5. Ongoing obligations

Once the project is completed, there are ongoing points to consider. In particular:

(a) Change-of-use provisions

If the constructing charity issued a zero-rate certificate, it is required to monitor its use of the building for a period of ten years. Any change from non-business to business use within this period could result in a VAT self-supply charge.

(b) Capital goods scheme (CGS)

If the standard-rated cost of the project exceeds £250,000, then it is necessary to consider the CGS. Broadly the CGS requires that the use of a building is monitored over a ten-year period. The VAT initially recovered is then adjusted according to the extent of taxable use. Taxable use is measured by reference to the charity’s VAT recovery method unless agreed otherwise.

(c) Standard and special method overrides

If a charity is partly exempt, it must check on an annual basis whether its partial exemption VAT recovery method is producing a fair and reasonable result. If not, then it may be necessary to apply an alternative method based on “use” – this is known as the override.


The above only ‘highlights’ some of the issues, and given the large sums that can be involved, it is good practise to ensure that the VAT implications are fully considered from the outset and advice is taken as necessary.

If you have any questions or concerns regarding VAT and property transactions, please get in touch.



« Back to the Knowledge Hub