The difference between an extension and an annexe to an existing building may appear slight, but it can have crucial tax implications for charities. The issue was raised by a case in which a church won the right to a substantial VAT rebate.
In order to make the rather austere-looking church more welcoming, a modern glass and aluminium building was added to one of its side walls. The church argued that it was an annexe and that goods and services supplied by builders and others in connection with its construction thus benefited from VAT zero-rating.
HM Revenue and Customs (HMRC), however, decided that it was an extension and that the relevant goods and services were therefore subject to standard rate VAT. It was submitted that the church could not benefit from provisions of the Value Added Tax Act 1994 which confer zero-rating on annexes intended solely to be used for charitable purposes.
In ruling on the dispute, the First-tier Tribunal (FTT) noted that the new building shares a wall with the church, but that direct access between them is confined to a single set of fire escape doors which can only be opened from the church side. The contemporary design of the new building is strikingly different to that of the church and it is self-contained in that it has its own main entrance, toilets and canteen facilities.
The new building, the FTT found, is a supplementary structure that cannot be viewed as an extension in that it lacks any ability to be used for any common activities with the church or an existing church hall. It was thus an annexe and the church was entitled to reclaim VAT paid on the relevant goods and services.
