Churches and temples are some of the most frequent benefiters from the VAT relief that applies to charity annexes to be used for relevant charitable purposes. They often erect new structures, but these are, for convenience or economy, commonly attached and linked to an existing building, rather than being physically separate. But it is far from straightforward to determine when such a development qualifies as an annexe, as distinct from simple extension or enlargement (which are not relieved).
The difficulties are demonstrated neatly by the First tier Tribunal decision in Roman Catholic Diocese of Westminster (TC06692) which related to St Joseph’s, Stevenage. HMRC denied relief on the basis that the new fabric did not create an ‘annexe’ in the VAT sense. The Diocese appealed and won the case. There are some interesting factors, and we cannot rule out an appeal, or that HMRC will accept this decision but decide not to apply it to others.
The new fabric is wholly given over to use as a church hall, and therefore has separate functionality to the church. It is of similar design, but distinguishable from the church. It has its own toilet facilities, and is mainly accessed by its own entrance. All these aspects appeared to be accepted by HMRC.
HMRC’s objections were as follows:
- The original building had incorporated a church hall, and the idea was to dedicate that building solely to worship, and to recreate the church hall function in the new fabric. That suggested that there was no new function created by the new part, so it was not, functionally, an annexe of the old building.
- The heating boiler system was sited solely in the old building, so the church hall was not independently operable from the church.
Neither of these points convinced the tribunal. There is no clear remit in the VAT legislation for viewing an annexe as something that must take on a new function. It seems rational to interpret it as a place that can take on a different function from the existing building’s function, following the development. The fact that the old building had had a church hall and worship area shoe-horned into it, should not prevent a structure that would, apart from that, be treated as an annexe being treated equally to an annexe that contained a new function.
The discussions regarding the heating arrangements appear exceptionally petty. HMRC sought to deny annexe treatment purely on the basis of a heating plant configuration which must affect many new structures. This was based on unsatisfactory obiter comment in a previous decision. Given that completely new free-standing buildings can share heating plant, which can sometimes provide heat across an entire estate, the argument that an annexe must have its own boiler appears completely impracticable and anachronistic. It should be sufficient for the temperature and on/off switches to be configured to work on a unit by unit basis, not that the heat must be derived from a separate boiler.
In any case, the annexe was soon equipped with its own new boiler, so HMRC’s argument was essentially technical, in that it had opened at a time when it worked off an old boiler sited in the old building. The tribunal was unmoved by HMRC’s contrived approach.
However, one aspect that seems curious is the existence of a dog that didn’t bark. This was in regard to the overlap of the annexe and the footprint of the church.
The terminology in the legislation is somewhat sketchy, but it refers to “the construction of an annexe to an existing building”. This is the exception to “any enlargement or extension” (which might otherwise be regarded as having occurred to the ‘existing building’). The natural interpretation of the above is that the new fabric should adhere to the side of the old structure. However, it does not expressly deal with the question of the treatment if part of the ‘existing building’ is demolished to allow a bigger footprint for the annexe.
And, as the tribunal clearly tells us, that is what happened in this case. About one third of the annexe occupied a former part of the church. The tribunal also correctly stated that the test had to be based on a pure ‘before and after’ test, such that one compared the old building prior to any demolition work, with the final result following construction. On that basis, the only additional footprint was part of the resulting new structure, not the whole of it, leaving the impression that the additional area was merely enlargement of what had been part of the building.
HMRC’s guidance refers to annexes being an “addition” to a building, or “attached” to a building. That is suggestive of little change being made to the existing building to accommodate the annexe, but does not deal with the point explicitly. They also refer to “adjunct” and “accessory”, which is vague, but also potentially suggestive of mere additional fabric.
Of course, this would be a strained way of applying the test, because, given that the church had been reduced in size, it was obvious that an annexe had been added. Nonetheless, there seems to be a lack of discussion around a relevant point.
But the failure to discuss this does not mean we can assume it will not be a problem in another case. Silence does not mean ‘consent’. So, the point remains untested, which is good news for St Joseph’s, but may not be such good news for those who follow after St Joseph’s.
Graham Elliott is CTG’s Technical Adviser and Director at City & Cambridge Consultancy