Extension or Annexe? Educational Charity Wins VAT Appeal

What is the difference between an annexe and an extension? That may seem a very narrow distinction, but the tax regime is replete with such fine points and it made a crucial difference to an educational charity in its successful appeal against a VAT demand.

The charity moved the premises of its nursery and primary schools to a 120-year-old former dwelling. It accepted that VAT was payable at the standard rate on renovation and modification works carried out on that building. However, it also constructed a new, adjoining building that provided a large, flexible space, suitable for use as an assembly hall or gymnasium. The charity argued that materials used in the construction of the new building, and sums it paid to the contractors, were zero-rated for VAT purposes. HM Revenue and Customs, however, did not agree.

In ruling on the matter, the First-tier Tribunal (FTT) noted that the Value Added Tax Act 1994 provides that construction of a building intended solely to serve a charitable purpose benefits from VAT zero-rating. However, that advantage does not apply to enlargements or extensions of existing buildings. The case therefore hinged on whether the new building was an extension or, as the charity contended, an annexe.

In upholding the charity’s appeal, the FTT noted that an extension generally refers to a building which provides an additional section or wing to an existing building. The term annexe, on the other hand, connotes a structure that is adjoining to, but either not integrated or only tenuously integrated with, an existing building.

The new and existing school buildings shared a party wall. However, their means of access were entirely separate and it was only possible to pass from one to the other by traversing some distance outdoors. The modern design of the new building was very different from the existing building and it could function independently, being fitted with its own toilets, kitchen, storage and office spaces. The new building was therefore an annexe and the costs associated with its construction benefited from zero-rating.