Independent Schools – VAT concession does not apply
By Scott Craig, VAT Partner Scott-Moncrieff

You may have heard about changes in VAT law that restrict the benefits of zero-rating new buildings for charities.  Although these changes come into force in 2010, they do not affect all charities. 

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The Rules

The VAT legislation allows a charity to zero-rate the construction of a new building or approved alterations to be made to listed buildings, on condition that the building in question is used for relevant charitable purposes. 

The term relevant charitable purpose is very specific and means that the building must be used by a charity for non-business purposes.  In plain English, this includes the provision of free-of-charge goods or services or in some cases (eg the provision of welfare) significantly below market value.

HMRC have historically accepted that if at least 90% of a building is qualifying, the remaining 10% business use could be disregarded.  HMRC have amended this concession, and announced that from 1 July 2010, qualifying use must exceed 95%.

In addition, charities that benefit from zero-rating from 1 July 2010 must monitor the use of the building for 10 years.  If in any year, the building does not meet the 95% test, it will be required to pay HMRC an element of the VAT that was saved on the original costs.

Although this will affect a number of charities, it should not affect the majority of independent schools

Application to Independent Schools

Although this will affect a number of charities, it should not affect the majority of independent schools.

Although most independent schools enjoy charitable status, the provision of education (in return for a fee) is seen as a business activity for VAT purposes.  We acknowledge that independent schools give bursaries and may have other non-business activities, however, in most cases this does not exceed the 90% VAT test under current rules.

In conclusion, although HMRC are restricting the availability of zero-rating for charities, this should not affect the independent schools.  Indeed it is unlikely that they would have benefited from the existing rules in the first place.

That said, under different rules, zero rating is available for the construction of new residential accommodation – including student accommodation.  With careful planning, the extent of zero rating can often be maximised.

For further information contact Scott Craig, VAT Partner scott.craig@scott-moncrieff.com