Q. My client owns and rents out commercial properties; mainly office blocks. A local charity has asked to take a lease on one of his buildings but is saying that VAT should not be charged on the premium or rent. My client has opted to tax all of his properties because he does not want to be partly exempt and, more importantly, this particular building is within the capital goods scheme. I have forewarned my client that if he were to make exempt supplies during the term of the scheme he may have to repay some of the VAT he claimed on the building and, understandably, he isn’t happy about that. Does he have any choice in this matter?
A. To be fair to both parties, if the amount of VAT at stake for your client is relatively small it may be possible to factor this in when negotiating the lease. However, whether a property owner facing a significant VAT loss has any scope to refuse to disapply his option to tax depends on how the charity intends to use the property.
To give some background, a charity that intends to use a building, or part of a building, solely for a relevant charitable purpose (RCP), but not as an office (VATA1994 Schedule 10 paragraph 7) can give a declaration to this effect to a potential landlord. This would then disapply the landlord’s option to tax on the property. Relevant charitable purpose means use by a charity either for non-business activities or as a village (or similar) hall.
However, the requirements are not as straightforward as they may, at first, appear. Both the word ‘solely’ and the phrase ‘not as an office’ are open to interpretation.
Firstly the word ‘solely’ is interpreted by HMRC as being 95% or more when looking at construction services or the grant of a major interest in a new RCP building. However, in the context of the disapplication of an option to tax, this 95% concession only applies where the supplier and customer agree. They confirmed this in Revenue & Customs Brief 33/10. Therefore, unless the charity confirms that its use of the building is 100% RCP your client is entitled to refuse to disapply his option to tax.
On the second point, the legislation does not define an office. HMRC explain their interpretation in their guidance manual VATLP22320 by saying that an office used for the administrative functions of a charity, similar to those functions of a business, would stop an option to tax being disapplied, but that an office used in the course of its non-business activities, such as a call-centre collecting donations would not. Therefore, if the office were an administrative centre, it would be straightforward; the option to tax would still apply. Even if not, however, as this distinction between the types of use has no basis in law, it may still be possible to use this as grounds to refuse disapplication.
It feels mean to be looking at ways of denying a charity a benefit, but where a business will be significantly disadvantaged by making a particular supply, it is open to the business to set the terms within the scope of the legislation, and for the charity to either accept the terms or shop around.
If your client decides to enter into this lease and the disapplication of the option to tax is appropriate then he should ensure he retains the declaration provided by the charity confirming the use. There is no set format for this so could either be in the form of a letter, as part of the lease or by adapting the certificate in Notice 708 paragraph 18.2.