Zero Rated – is a building an annexe used for a relevant charitable purpose?
A First-Tier Tribunal was held on 29 November 2018 between HMRC and Oholei Yosef Yitzchok Lubavitch Schools (“OYY Schools”) to determine if construction was zero rated or standard rated for VAT purposes.
OYY runs a nursery and a school. The nursery had never made a profit and seeks donations from the community to cover any shortfalls. The parents of the children are charged a ‘contribution fee’ to cover running costs. However, no child is turned away due to lack of payment as the focus is on religious matters.
In 2013, it was decided to move OYY Schools to a newly acquired site. The existing residential building was to remain and have some internal works completed. The existing extension to the rear of the property was to be demolished and a new single-story area be constructed in the same location (the new structure).
The new structure is physically attached to the existing building by sharing a wall and consists of a large rectangular space that can be partitioned by a sliding/folding screen (like a school hall/gymnasium). There is no internal access between the existing building and the new structure. There is also an office which is used for charitable purposes.
The school would use the existing building and the nursery would use the new structure. Both the nursery and the school can operate independently of each other.
The existing structure and new structure each have their own entrance. The existing buildings entrance is at the front of the property and the new structures entrance is at the rear of the property.
For the new structure to be classed as zero rated, it is required to be an annexe that is intended to be used for a ‘relevant charitable purpose’ and is not in the course or furtherance of business. To determine this, the Tribunal addressed the following main requirements:
- Is the new structure an extension or an annexe?
Simply because the new structure is physically attached to the existing structure does not mean that it is an extension rather than an annexe. The existence of an internal access to the new structure is a material factor in determining whether the work is an extension rather than an annexe.
The new structure is not sufficiently integrated to be considered an extension to the existing building and it is an annexe.
- Can the new annexe function independently from the existing building?
The annexe has its own toilets, kitchen, storage and office spaces. It is connected to water and electricity and has its own separate boiler.
There is no access to the annexe internally. Each building has its own main access. Even though the existing building and annexe are on the same parcel of land, it does not alter the fact that the annexe can function independently from the existing building.
- Was the intended charitable use of the annexe in the course or furtherance of a business?
Just because the provider has a charitable status does not automatically mean its operations cannot be classed as a business. The school and nursery are run on a non-profit basis. OYY Schools needs to finance its activities and does this through amounts paid by parents of children attending the school and nursery and through donations and grants. The Tribunal found these fees are set at a level designed to ensure OYY Schools covers its costs. Then donations are used to subsidise the fees. The Tribunal found the fees set would not allow the nursery to break even and if there were no other sources of income, the nursery would operate at a loss. The ability of the nursery to exist and to carry out its charitable purposes depended on receipt of donations and grants from other sources. The Tribunal found that the annexe was not used in the course or furtherance of a business.
The Tribunal ruled that the appeal by OYY Schools was allowed, and the construction of the annexe was zero rated for VAT purposes.
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