VAT and charitable purpose – a not very charitable decision

Selling property is complex.

If the vendor has opted to tax its commercial property, it will claim input VAT on its costs attributable to the expected taxable supply of the property.  If the purchaser is a charity, however, the vendor might receive certification from the purchase that the property will be used solely for relevant charitable purposes.

The effect of the certification is that the vendor’s option to tax is disapplied and its sale to the charity becomes exempt.  The attributable input VAT already claimed becomes repayable to HMRC.  It is therefore important to confirm with prospective buyers at an early stage whether they intend to produce such a certificate.

The vendor will have a difficult commercial decide to make, as to whether to accept the loss of input VAT and to proceed with negotiations to sell to the charity.  It is easy at such a time to overlook the validity of the certification.  The risk is that HMRC will assess the vendor for the output VAT not charged on the sale of the property, with the vendor being left to recover payment of the additional amount from the purchaser, perhaps several years after the sale has completed.

This does not seem to be very charitable to the vendor, who will find it difficult to “police” the intentions of the purchaser.  This was illustrated in the case of Institute For Orthodox Christian Studies, Cambridge v Revenue and Customs Commissioners ([2015] UKFTT 0449 (TC), published on 18 September 2015).

The Book Production Consultants Retirement and Death Benefit Scheme, the VAT registered entity vendor, had opted to tax its commercial property.  When it came to sell to a charity, the Institute For Orthodox Christian Studies, the vendor received certification that the charity intended to use the property solely for relevant charitable purposes.  The vendor duly disapplied its option to tax.

Two years later, HMRC decided that the purchaser had not used the property solely for relevant charitable purposes.  The charity had rented out parts of the property which, although exempt for VAT purposes, constituted a business activity.

Instead of pursuing the purchaser for making an invalid certification, HMRC assessed the vendor for the VAT not charged on the sale of the property.

Vendors involved in the selling of property should be vigilant to various VAT risks and should take measures to protect itself accordingly.

For further information and help on VAT and property transactions, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.