'Development' for this purpose is not defined, but is interpreted to mean any physical adaptation or preparation for a new use.
The obtaining of planning permission does not constitute physical development.
One possible way to avoid a Section 776 charge may be to use a separate trading subsidiary. However, under charity law the charity cannot gratuitously give away assets or rights to its trading subsidiaries and transactions will need to be on an arm’s length basis. Moreover transactions involving disposals of land and buildings to a trading subsidiary are fraught with tax and accounting complications, and need to be considered very carefully.
VAT position
The sale of a commercial building that is under three years old is subject to VAT. After the three years the sale is exempt from VAT but with the option to tax (see section 1.8). Charities may consider opting to tax buildings prior to sale in order to recover VAT on professional fees or on preparation of the property for sale. This decision will very much depend on the ability of a potential buyer to recover the VAT charged. Where the property is to be purchased for the
conversion to a residential purpose the option may be
disapplied – it is recommended that further advice is taken in these circumstances.
The sale of a residential building is generally exempt from VAT. Where the sale or grant of a lease over 21 years is the first grant of a major interest the sale by the developer is zero rated for VAT.
The first grant of a major interest in a building constructed for relevant charitable purposes is also zero rated for VAT. Relevant charitable purpose means a building that is intended for use as a village hall or for use by a charity for non-business purposes. The sale of bare land is exempt from VAT with the option to tax. The option to tax is generally not applied where the sale is to a housing association subject to special provisions contained in public notice 742A. The option is disapplied if the sale is to an individual for the purpose of creation of a dwelling. It is recommended that further advice should be taken in these circumstances.
10.5
GIFT AID AND ADMISSION TO PREMISES
Also see Sections 7.7 and 7.8 on cultural events.Many charities charge a fee to visitors to their premises – for example, an entrance fee to visitors to a museum or zoo. There have been a number of changes to the rules that govern whether this payment can qualify as a Gift Aid payment. Generally, admission charges do not qualify for Gift Aid but if a charity allows visitors an equivalent right of free admission in return for a donation, Gift Aid may apply.
The rules that were enacted in the Finance Act 2005 have broadened the scope of which charities qualify for the exemption so that all charities where the public pays an admission charge to view qualifying property can benefit from the exemption. This means that Gift Aid can be used (in certain circumstances) if the right of admission is a right granted by the charity for the purpose of viewing property preserved, maintained, kept or created by a charity in pursuance of its charitable purposes. Property includes, in particular: • buildings;
• grounds or other land; • plants;
• animals;
• works of art (but not performances); • artefacts; and
• property of a scientific nature.
The rules limit the application of the popular Gift Aid on entry type schemes. The new rules will apply where the following conditions are met:
• The visitor makes a donation that is at least 10% more than the admission charge for the equivalent right of admission.
Or
• The donation secures admission to the property for a twelve-month period, for example through a season ticket or a membership scheme. Access should in general be unlimited whenever the property is open to the public during that 12 month period but
charities may exclude from the right of admission up to 5 days in each 12 month period when the property is otherwise open to the public and still qualify.
The VAT position generally is unaffected and only the additional 10% on top of the admission fee is treated as a donation for VAT purposes.
Family Tickets
If a charity has a membership scheme that meets the conditions discussed above, and a family ticket admits the donor and members of their family, the donor who purchases the family ticket may complete a Gift Aid declaration for the payment of the family ticket. HMRC have accepted that the charity does not have to ensure that those attending are a “family” and have stated that the definition of “family” is a matter for the charity to decide in accordance with its admissions policy. It is likely that the charity will decide to set limits on the number of adults and/or children who can be admitted by a family ticket. In addition, it is not necessary for all individuals included in the family ticket to enter together. Note that the family ticket scheme does not extend to general group tickets.
Voluntary donations
Many arts galleries and museums are now open to the public free of charge. They often seek voluntary donations from visitors and for the avoidance of doubt it should be clarified that as long as the donations meet the rules the donations will qualify as Gift Aid payments.
10.6
FREQUENTLY ASKED QUESTIONS
We are setting up trading activities overseas. Will we get the same tax exemptions overseas? Short answer
Not necessarily.
In more detail
Local tax law will in the overseas regime not automatically allow the same concessions and exemptions as apply in the UK. Charities have found that they face local tax liabilities because the
exemptions do not work in the same way as they do in the UK. In many overseas regimes the concept of charity as it is in UK is not recognised and simply setting up an operation overseas can lead to the creation of a permanent establishment for tax purposes.
We are disposing of a property which has been owned by the charity as an investment for some years, and we understand that we will get a better price if we (successfully) apply for general planning permission. Will Section 776 apply? Short answer:
Simply applying for and obtaining planning permission will not trigger a tax liability.
In more detail
However, if the charity then goes on to carry out any physical development work after obtaining planning permission then the profits from this could be taxable under S776. Typically a development will have a number of different stages and it is important for the charity to identify the tax treatment of each different stage.
In addition, if a charity shares in development profit then this will trigger a tax liability.
10.7
KEY FACTS
Trading overseas can lead to tax even if the trade would not be taxable in the UK. The local laws need to be considered. In certain cases withholding tax may be applicable.
Property rental is exempt from direct tax unless it involves the provision of non-landlord services.
Property sales will generally be exempt from direct tax unless they involve either buying or selling land with a view to a profit, or property development. Advice should be taken.
Property sales can be a very complex area both for direct tax and for VAT and charities need to take advice when planning property transactions.