Immanuel Church undertook building work and claimed that this qualified as an annexe rather than an extension to what was already there. In terms of VAT, this would therefore qualify the works to be charged at the zero rate as opposed to the normal 20% rate. This would result in a significant saving for the church, which itself was not VAT registered.
The First-tier Tribunal (“FTT”), in its decision of 24 September 2019, agreed with the appellant in this case and ruled that the building was a “supplementary structure” as it lacked any ability to be used for common activities with the existing buildings of the church.
This decision is good news for anyone looking to undertake building work on charitable buildings and considering an “annexe” argument with HMRC rather than an extension to current buildings, thereby resulting in the zero rate being applicable.
The appeal was allowed.
The facts
Immanuel Church (“the church”) was looking to undertake various building works as a result of a concept developed by the church some 15 years earlier, to develop a strategy for reaching into the community.
The church already had a separate welcome area where refreshments had been served. The primary result of the extension/annexe was to provide a place where people could sit and chat, with free drinks provided.
An initial planning application and a Design & Access Statement (“DSA”) had been prepared. These included building works to the side of the existing church, renovations to the hall and flats to be constructed above. This appeal was to consider the works to the side of the church alone.
Approval was granted in June 2014.
A cost reduction exercise followed as a result of the tender returns being over the church’s budget. A number of changes were proposed, including retaining the original ramp access to the church building and downgrading to a “non-heated” simple corridor between the church and rear hall buildings. A revised planning consent had been issued allowing for the variations.
Among the key features of the building finally constructed:
- A separate extension/annexe was created to the side of the church which was self-contained, and which served as a welcome/coffee area;
- The new building was built in an entirely different style to what was there already;
- A covered link roof was constructed between the rear hall and wall of the main church;
- A fire escape from the main church could only be operated from the church;
- The existing church, hall and extension/annexe all have separate main entrances;
- The extension/annexe was designed to be self-contained, with its own canteen and toilet facilities;
- The extension/annexe has independent gas and electricity supplies.
In order for VAT zero-rating of construction services, the services must satisfy the conditions set out in Item 2, Group 5, Schedule 8, VATA 1994 i.e. construction for a relevant charitable purpose (“RCP”).
Notes 16 and 17 to that group must also be adhered to:
- Note 16 – included is the fact that the works must not be an enlargement/extension to an existing building;
- Note 17 – where an annexe is constructed which is used for RCP, it must:
- Be capable of functioning independently from an existing building; and
- Have its own main access point.
The decision
HMRC’s Statement of Case referred to aspects of the original DSA which had been superseded by the changes proposed and agreed. Accordingly, HMRC accepted that the conditions set out in Note 17 had been met. Furthermore, it accepted the extension/annexe was to be used for RCP.
The only question to be resolved was whether the building was either an extension/enlargement to the original building or was an annexe.
Earlier cases gave guidance as to three key considerations:
| Area to consider | The church’s new building was… |
| Similarities or differences in appearance | Different in style from what was there initially |
| Layout, the uses for which they are physically put | Not connected to (i.e. not extended from) the hall |
| Functions which they are physically capable of performing | Not capable of being used as a church |
The new building was therefore considered by the FTT to be a supplementary structure, capable of a zero rating for VAT.
Who is potentially affected?
This is a very welcome decision in light of numerous cases not succeeding with similar arguments. One very important point that comes out of the FTT’s judgement is that “what matters is the building as it was eventually built, not the original plans”.
The FTT decision demonstrates that providing you meet all of the three tests suggested above, you have a good case for zero-rating which could mean a saving of 20% of the construction costs.
For more information, please get in touch with our VAT specialists using our enquiry form.