It is well known that building work can be standard rated or, if it meets one of the exemptions in the Value Added Tax Act 1994, Section 30, Schedule 8, it can be zero rated for VAT purposes.

Among the qualifications for zero rating is whether the building is to be used for a ‘relevant charitable purpose’.

When a charity acquired and renovated a listed property, it gave zero rating certificates to its contractors and they did not charge VAT on the building works. However, the renovated building was not to be used directly for the purposes of the charity, the plan being to let it to a private fee-paying school.

One of the contractors involved contacted HM Revenue and Customs (HMRC) to check that it was in order for it to issue zero rated invoices for its work. HMRC’s reply was that as the property was to be used as a fee-paying school, all invoices were to be standard rated. HMRC then wrote to the charity saying that it understood it had been issuing zero rating certificates to contractors and that these had been incorrectly issued.

The dispute over the VAT status of the supplies was founded on whether the converted property was ‘solely’ to be used ‘otherwise than in the course or furtherance of a business’.

The First-tier Tribunal concluded that despite the fact that the lease was at below market rent and not intended to yield long-term profits, the property had been intended for use in the course of an economic activity. The judge concluded that the definition of ‘economic activity’ was a very wide one.