In July of this year HM Revenue and Customs (HMRC) announced changes to how they will interpret legislation which governs the zero-rating of buildings intended to be used solely for a Relevant Residential Purpose or Relevant Charitable Purpose.

The changes are somewhat of a double-edged sword. Some charities, which includes providers of further education, are likely to lose out, whilst businesses which make use of residential buildings could make significant tax savings.


Both the acquisition and construction of a new building which is intended to be used "solely" for a Relevant Residential Purpose or Relevant Charitable Purpose is a zero-rated supply, so long as the user of the building provides a certificate to the supplier confirming the intended qualifying use. If such a building is put to a business use within ten years of it being completed then a change of use charge will apply and VAT is due to be repaid to HMRC as the building is no longer eligible for zero-rating.

In relation to buildings to be used for a Relevant Charitable Purpose, as a concession, HMRC has previously interpreted "solely" as being where 90% or more of a building was used for a Relevant Charitable Purpose. This was an important concession as it is common for charities to use part of their buildings for business use as well as non-business charitable use.

The concession, however did not apply in relation to buildings to be used solely for a Relevant Residential Purpose. Even the smallest amount of intended business use of a building which would otherwise meet the definition of Relevant Residential Purpose would prevent zero-rating of the acquisition or construction of that building.

Where a building qualified for zero-rating as a result of the concession described above no change of use charge was applied when the change of use had not been envisaged at the time zero-rating was obtained under the concession. For example, if a charity purchased a building, 92% of which was intended to be used for a Relevant Charitable Purpose, but five years later the actual use changed to 87% there would be no change of use charge unless it was clear that the charity anticipated, at the time zero rating was obtained, that the qualifying use would fall below 90%. This gave charities flexibility in their arrangements and avoided the need to repay VAT to HMRC if their intended use changed.

The Changes

HMRC gets uncharitable with charities

HMRC has announced that, as from 1 July 2009, its interpretation of "solely" will now only be met where the intended use is 95% or more. This is likely to have a significant adverse impact on some charities. Those most likely to lose out are charities who have contracted to purchase a building with an intended charitable use above 90% but below 95%. Whilst a transitional period is in operation until 30 June 2010 many charities may lose out, especially where they are purchasing or have commissioned the construction of a building which will not be completed until after 30 June 2010. This could represent a significant cost to charities as VAT will be charged at the standard rate of tax on the new building, where previously it would have been zero rated, and they will be unable to recover the input tax due to their charitable status.

HMRC accommodate residential buildings

The new interpretation of "solely" is being extended to cover buildings intended to be used solely for a Relevant Residential Purpose. This includes use as student accommodation, children's home, care home and hospice, so this will impact on a variety of sectors. Both the acquisition and construction of a building, 95% of which or more is intended to be used for a Relevant Residential Purpose, will qualify for zero rating. As previously mentioned, prior to 1 July 2009, the intended qualifying use had to be 100% in order to qualify for zero rating.

Method of calculation

For both types of buildings, previous restrictions in the method to be used to calculate the percentage use of the building have been lifted and any method can be used so long as it is fair and reasonable. This may present an opportunity for buildings to qualify for zero-rating where it was not available in the past.

Change of use

A significant change has been introduced in relation to change of use following zero-rating. Where a change of use occurs within ten years from completion of the building, where zero-rating was obtained by virtue of the 90% concession, a change of use charge will now apply. The concession where no charge was made, as described above, has been withdrawn. HMRC states that it expects taxpayers to review their use at least once a year. Once a building has qualified for zero-rating, users must be careful when making even small changes to their use of the building that they do not trigger a change of use charge which could result in a huge VAT bill.

Opportunities and pitfalls

Whilst these changes will have a negative impact on some charities, they also present opportunities both for charities and those involved with relevant residential buildings, if the correct advice is taken at an early stage of planning. Biggart Baillie's Tax team can provide advice to ensure that businesses make full use of the opportunities and avoid the pitfalls which these changes have brought about.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.