A question that is frequently asked by clubs is can the club register for VAT and recover VAT on building works, be it an extension to an existing clubhouse building or the construction of a new building? As with most VAT issues the answer is not a simple yes or no and the following article aims to simplify the matter and provide a helpful overview to clubs.
Do clubs pay VAT on the building works?
The first question that a club needs to establish is whether VAT will be incurred on the works and the answer will almost certainly be yes. This is the case even where a club is a registered charity or Community Amateur Sports Club (CASC). The only VAT relief for construction of buildings is where a registered charity is building a new stand alone building for use either for what are termed as “non business purposes” or where the building is to be used in a way similar to a community use village hall.
This issue has been continually tested in the VAT Tribunal and higher Courts with the outcome, almost without exception, being a success for HMRC in blocking the use of the relief. Invariably the only successful appeals have been where the building is to be used as a genuine community asset run and managed by a group of community based organisations. However, it is important to note that a recent Tribunal decision effectively closes the door for zero rate new builds for members’ sports clubs when it determined that members of a club are deemed to be using the building primarily as members of the club and not as members of the local community!
The latest issue to be tested before the Courts was whether a CASC was eligible to use the relief. This matter went all the way to the Court of Appeal which decided that the relief was strictly to be available only for a registered charity and then only when the strict interpretation of the permitted uses was met.
This being so, it is highly unlikely that your club will avoid the need to pay VAT on building works, be it an extension or enlargement of an existing facility or a new stand alone building.
Great care should be taken on this issue to ensure that the club does not issue an incorrect certificate to its builder stating it is eligible for the relief. The penalty for an incorrect declaration is 100% of the VAT that would have been incurred had the correct level of VAT been charged.
My strong advice to any club is to seek professional advice in advance of issuing a certificate claiming VAT relief on building works.
Can clubs register for VAT?
On the basis that VAT is likely to be charged to the club the second question that arises is can the club register for VAT purposes and seek to recover all or part of the VAT incurred? Happily, the answer to this question is invariably yes.
An application to register for VAT purposes can be made at any time where the club generates what is termed as ‘taxable’ income. That is income liable to VAT. The level of taxable income does need to exceed the compulsory registration threshold of £85k (2022) taxable income per annum as a club can seek to register on a voluntary basis. Clearly the motive for a voluntary VAT registration is a financial gain achieved through recovering VAT incurred on a major facility improvement project.
How much VAT can be recovered?
This is of course the key question! Unfortunately, however, the answer is not straight forward.
Typically, a club should be able to recover all VAT incurred on projects costing up to £50k where the VAT incurred is £10k. For projects costing more than this it is likely that a partial restriction may apply with the level of VAT recovery being determined on the specific circumstances of each club.
It is a common misconception that a club can only recover VAT on cost equal to its turnover. This is not the case. The ability to recover VAT on costs is determined firstly by the activity to which the cost is attributable and secondly on the relationship between what are termed as the taxable and exempt incomes generated by the club.
Herein lies the issue. VAT can only be automatically recovered when the cost is attributable to a taxable income. These could include costs relating to the bar or catering activities or goods bought for resale such as equipment and merchandise.
VAT incurred on costs attributable to the exempt activities of the club can only be recovered when it is no more than a pre-set de minimis threshold of £7,500 per annum. The ability to recover VAT on exempt related cost is an ‘all or nothing’ position. If the annual value of exempt input tax (VAT incurred on costs attributable to an exempt activity) is less than £7,500 then it can be recovered in full. If, however it is over this threshold then all of the exempt input tax is irrecoverable.
The exempt activity of the club will primarily be the income generated from sports participating membership subscriptions and other sports related incomes such as mooring/storage and competition entry fees.
Looking specifically at the clubhouse building this will invariably contain areas used for both taxable activity such as bar and catering supplies and exempt activity such as changing rooms, showers etc. It is also an established position that the social areas of the clubhouse are deemed to be a facility and advantage of membership enjoyed through the payment of the exempt membership subscription. So even though the lounge and bar areas will be used almost exclusively for taxable bar and catering purposes they are deemed to be used jointly for both taxable and exempt purposes. As such VAT incurred on clubhouse related costs must be apportioned to reflect this dual use so that part of the VAT is deemed to be taxable input tax and can be automatically recovered and part exempt input tax and only recoverable if the £7,500 de minimis threshold is not breached in the year.
The apportionment is usually based upon the overall income of the club so that the taxable proportion is established by reference to the taxable income as a percentage of the total income (taxable plus exempt only so excluding grants, donations, loans and other financial incomes).
By way of example if a club was seeking to assess its ability to recover VAT incurred on a £150k clubhouse refurbishment and extension programme the projection of VAT recovery would looks as follows:
VAT on works - £150k x 20 per cent = £30,000
Taxable income say £45,000 (bar and catering sales, function hire, club shop, merchandise)
Exempt income say £25,000 (membership subscriptions, competition entry fees, mooring fees)
£45,000 x 100 divided by £70,000 = 65 per cent
VAT incurred on works £30,000
So, taxable proportion = £30,000 x 65 per cent = £19,500 taxable input tax so automatically recoverable
Exempt proportion =£30,000 x 35 per cent = £10,500 exempt input tax (irrecoverable as exceeds the annual de minimis allowance of £7,500).
So in this example the club would be able to recover £19,500 of the VAT incurred on the works.
How soon can a club de-register for VAT?
A common question is whether a club can de-register for VAT purposes following the recovery of VAT on the project and would there be any ‘payback’ of the VAT recovered?
There is no specific time frame for which a club would be required to remain registered (on the basis its taxable income remained withing the £85k compulsory threshold). It would probably need to remain registered for no less than 12 months. However, there is no hard and fast rule on this and understandably HMRC will not comment on this matter!
In terms of payback, the requirement on de-registration is to pay VAT to HMRC on any ‘business assets’ held upon which VAT was recovered where the aggregate market value of the goods exceeds £5k. The issue here is that the club has incurred VAT on the refurbishment/improvement and this was critically building ‘services’, rather than ‘goods’. As such no VAT should be repayable on de-registration on the building unless it has been formally opted to tax.
The consequences of registering for VAT
The illustration set out above would enable a club to save a significant amount of VAT on its clubhouse refurbishment project. However, the consequence of registering for VAT purposes is that VAT is due on taxable incomes.
This will primarily be the majority of bar and catering sales where the selling price will become VAT inclusive. The club will however be able to fully recover VAT it incurs on wet bar purchases and other costs, so the VAT cost arising is merely on the profit margin applied (the ‘value added’). The club can choose to suffer this cost or increase prices to pass the VAT cost onto its bar users. Some bar and catering income can be treated as exempt from VAT where the club stages a fundraising event which is primarily held to raise funds for the club and/or a charity.
Other income liable to VAT will include hire of the clubhouse for functions such as weddings, birthdays and wakes where the main reason for the hire is use of the bar and catering facilities (room only hire for other purposes is exempt from VAT), social memberships, and equipment and merchandise sales.
Turning to expenses, in years where the club does not undertake any material facility improvement projects it is likely that all VAT incurred on all expenses will be fully recoverable, including the exempt input tax, as it is likely to be within the permitted de minimis allowance of £7,500.
So in summary, a club can register for VAT on a voluntary basis at any time it generates taxable income even if its annual value of taxable income is below the compulsory threshold of £85k.
It should be possible for most clubs to enjoy a sizeable recovery of VAT incurred on facility improvement projects although ultimately this is determined on a club by club basis with reference to the relationship between taxable and exempt incomes generated as set out above.
Did you know?
Did you know that RYA Affiliated Clubs can now speak with VAT and Corporation Tax Consultants as part of their member benefit? Your club can claim a free 30-mins consultation with VAT Consultant, Russell Moore and / or Corporation Tax Consultant, Richard Baldwin. To arrange an appointment for your club, please contact Russell via firstname.lastname@example.org or 07710 329317 and Richard can be contacted on 01494 730059 and email@example.com