Does building work qualify as the zero-rated construction of an annexe intended for use solely for a relevant charitable purpose?
Jan Garioch CA discusses a recent case, Immanuel Church v HMRC, which saw the First Tier Tribunal bring clarity to a common dispute.
The First-Tier Tribunal was served up a familiar question by Immanuel Church in Bournemouth on whether its construction costs for a new extension/annexe qualified for zero rating. As is typical in such cases, the Tribunal was presented with a lengthy history of the project from its origins 15 years previously. At points within that period, the plans were more elaborate than what was finally constructed. Since the costs outstripped the Church’s budget a process of ‘Value Engineering’ commenced. That elegant term covered a cost cutting exercise where changes were made to the original plans to bring the project within the available budget.
Changes to the plans
The Tribunal learned a number of elegant architectural terms in the course of their deliberations. For example, a clerestory is a high section of wall with windows above eye level to admit light which would create impact in any project. Lovely as it sounds, it creates complexity and cost and so was deleted in favour of a humble flat roof. Another casualty of cost cutting was a ramp construction which would have seen wheelchair access exclusively through the new building. That was axed and the existing access to the Church was unaltered. It became clear to the Tribunal that HMRC’s Statement of Case referred to aspects of the plans which were superseded.
The point at issue
HMRC were obliged to recognise the significance of these changes and accepted the new annexe/extension is capable for functioning independently from the existing building and that there are separate main entrances for both. Since HMRC also accepted that the new extension/annexe is intended for use solely for relevant charitable purposes, the Tribunal concluded the only point at issue was whether the new building is an annexe which can qualify for zero rating or merely an extension which cannot.
Factors to consider
Bryan Thomas Macnamara v HMRC (VTD 16039) differentiated building terms on a scale from ‘most integrated’ to ‘least integrated’ to an existing building. Alterations, reconstructions and conversions fall at the most integrated end of the scale. Enlargements and extensions have a lesser degree of integration. An annexe is not integrated with the existing building or of tenuous integration. Cantrell v Customs & Excise Commissioners (STC 486) pins down when the comparison must be made between the building as it was and as it will be after the works are completed. It must be done at the time of supply.
Therefore, what matters is the building as it is eventually built and not as originally planned. Equally, the actual use to which the building is subsequently put is of relatively limited importance. What is important is the use for which it is physically capable to be put. Finally, in St Brendan’s Sixth Form College v HMRC (UKFTT 128) a new building was connected to an existing building by means of a covered bridge at first floor level. It was held this was not sufficient to render the new building part of the existing building.
The decision
Applying these principles, the Tribunal concluded that the new building, which is in modern glass and aluminium design in contrast to the existing brick building, is not an extension because it lacks the ability to be used for any common activities. The only connection with the Church is via a set of fire escape doors which open only from the Church. It is simply too separate from the old church hall to be used for a common activity. Consequently, it is an annexe which HMRC acknowledge its intended use is for relevant charitable purposes and thus it qualifies for zero rating.