On 24 November 2022 HMRC updated VAT Notice 708, paragraph 14.7.4, to refresh its policy relating to the classification of the use of a building as a ‘village hall’, in respect of the Relevant Charitable Purpose (RCP) relief for constructing buildings for certain charitable uses.
This change arises from a series of court cases relating to the definition of ‘village hall’ for these purposes. It comes shortly after HMRC confirmed its revised policy concerning the definition of ‘business’, which also has an impact on the definition of RCP. However, it is possible for a village hall to be treated as for an RCP even if it is used for business purposes, though HMRC unfortunately implies that that might not be the case at one point in the revised text.
HMRC confirms that CASCs are not included in the definition of a charity for the purpose of this relief.
The new guidance outlines the way in which the building will be used and operated by the charity that purchases the relevant construction services or building. It confirms that the correct use must arise for at least 95% of the use of the building. It stipulates a requirement that the building must be used in an essentially non-commercial manner, that is where the charges made are “modest”, and the financial model generates at most a small profit, which then is used for the benefit of the facility or for other activities in the local community.
The building must also be used for general community purposes, with a wide range of activities, and open equally to a wide swathe of society.
Some aspects of the policy could cause confusion. A heading says: “Used solely to provide social or recreational facilities for a local community”; whereas text elsewhere says: “Users of the building are not limited to the local community but can come from further afield”.
A requirement that the operating charity constitution has a dissolution clause requiring that the building be transferred to “another qualifying body” upon dissolution, seems excessive in light of the fact that the legislation simply requires that the building be used for ten years in a qualifying manner. It is also doubtful whether the articles of association must stipulate that the charity will use its building for wider community purposes, particularly since charity constitutions sometimes have a catch-all category of any charitable use.
However, the new policy does remove the error traditionally applied by HMRC to the effect that the charity must exist solely for the purpose of running a community recreation centre, and be under community governance. This therefore preserves the case law precedent to the effect that a building which is meaningfully open on a first come first served basis, to all of the local community, can be run by a charity which is constituted primarily for other purposes such as sport, drama, music, or whatever.
What these changes chiefly remind us, is the fact that HMRC’s previous policy was simply wrong in its interpretation of the legislation. Accordingly, these changes should not now be taken as a strict legal definition, but as HMRC’s interpretation, which could still be challenged as appropriate. It is a pity therefore that HMRC refers to these as “updated conditions”, which seems to imply that there has been an actual change in the legal tests.
It is also unfortunate that grammatical and stylistic errors have not been picked up prior to publication.
Graham Elliott is Technical Adviser to the Charity Tax Group