Church wins appeal on zero VAT rating for annex

A church in Bournemouth has won its appeal that its newly built annex to its main building should be zero-rated for VAT, after a First Tier Tribunal (FTT) found HMRC’s decision to seek VAT payments was based on largely out of date plans for the development

Immanuel Church had building work undertaken, part of which created new facilities next to its main church building. The church maintained that the new facilities were a zero-rated annexe whereas HMRC argued that a standard rated extension to the existing building had been created. [Immanuel Church and the Commissioners for Her Majesty’s Revenue and Customs, [2019] UKFTT 0601, TC07384].

In the view of the tribunal, ‘what matters is the building as it was eventually built, not the original plans’.

The tribunal heard that the original plans proved to be over budget when put out to tender, so the church asked its architect for revised drawings with several features removed or altered to reduce costs. 

Under this revision, the original ramp access to the church building, which had been removed in the original plans was retained. Prior to this change the only access to the church for wheelchair users would have been via the new building.

Additionally, the atrium and lobby at the rear of the church, between the church building and the rear hall building, which contained halls and various store rooms, was down-graded from being an integrated part of the building complex to a simple covered corridor, with flagstone flooring and doors at each end. There was no heating of this area in the revised plans.

The tribunal stated: ‘It is notable that much of HMRC’s statement of case refers to aspects of the new building works set out in the initial design and access statement, significant parts of which were superseded by the changes referred to above.’

The FTT also noted that an attempt was made to resolve this appeal by way of alternative dispute resolution. A meeting between the parties was held on the site, during the course of construction, but the parties failed to reach agreement.

The construction of a new relevant charitable purpose building is zero rated (Item 2, Group 5, Schedule 8, VATA 1994). Note 16(c) of the group specifies that when applying Item 2, ‘subject to Note (17) below, [the construction of a building does not include] the construction of an annexe to an existing building’.

Note 17 states that Note 16(c) does not apply, and therefore an annex can be zero-rated, if it is used for a relevant charitable purpose and (a) is capable of functioning independently from the existing building; and (b) the annex and main building each have their own main access.

HMRC accepted that the new building was used solely for a relevant charitable purpose and that the conditions of Note 17 were met. The two buildings on the site had their own entrances, their own toilet and catering facilities etc and therefore could function independently. The question before the FTT was whether the new building was an annex or an extension for the purposes of Note 16(c).

The new building was physically connected to the church in two ways. They shared a common party wall and there was a covered walkway between them at the rear of the site. The FTT was satisfied that the covered walkway was not sufficient to render the new building an extension of the old.

The judge accepted it might be asked if the new building could be considered to be an extension of the church building if, for instance, it could be used as a social/coffee area for the congregation following a Sunday service. However, the church building already had its own coffee/welcome area, at the front of the church, and did not need an additional area of this nature.

HMRC had also suggested that the new building might be used by church-goers as an additional toilet facility, via the inter-connecting doors.

The tribunal noted: ‘However, although these interconnecting doors might provide a means for church-goers to leave the church to make use of the toilet facilities, they would be unable to re-enter the church other than by exiting the new building via its main entrance and re-entering the church by its main entrance. This does not therefore seem a likely or sensible use of the new building.’

The FTT concluded that ‘lacking as it does any ability to be used for any common activities with existing buildings’ the new building was a supplementary structure and therefore it was an annexe, not an extension. The appeal was therefore allowed.

Sarah Kay, Croner-i tax writer said: ‘Determining whether or not new structures which are connected to existing ones are extensions or annexes can be difficult in practice, and therefore disputes with HMRC on this point arise are not uncommon.

‘It is unfortunate that HMRC’s case at the FTT appears to have been largely based upon the design and access statement submitted with the church’s initial planning application. The church could not finance its initial plans and the design of the building work was revised before work commenced.'

Pat Sweet

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