Certificates for qualifying buildings: what 'solely' means
For supplies relating to ‘relevant residential purpose’ and ‘relevant charitable purpose’ buildings, the recipient of the supplies must certify that the building will be used intended ‘solely’ for such purposes before the supplies can be zero-rated or reduced-rated.
It is accepted that the term ‘solely’, when used in this context, can incorporate an appropriate de minimis margin of use that isn’t for either or both of the above purposes. In order to avoid unnecessary disputes in marginal cases, we accept that for supplies falling within the scope of Groups 5 and 6 of Schedule 8, the ‘solely’ requirement is satisfied if the use for either or both of the above purposes is 95 per cent or more.
For supplies falling within the scope of Groups 6 and 7 of Schedule 7A, ‘solely’ can also incorporate an appropriate de minimis margin but its value will need to be agreed with HMRC on a case-by-case basis. A de minimis value exceeding 5 per cent is unlikely to be acceptable, however.
How to calculate whether the ‘solely’ requirement is met
Any calculation method can be used to demonstrate 95 per cent or more qualifying use provided it produces a fair result. We accept any method to be fair provided it:
- accurately reflects the extent to which the building (or part, if appropriate) is intended for use for a qualifying purpose
- its application isn’t unduly burdensome and we can check its accuracy relatively easily.
The following are calculation methods that have been accepted as producing a fair result. They aren’t exhaustive or prescriptive and others can be used. In any case our prior approval of a method isn’t required before it is implemented.
A research laboratory employs 275 full-time staff but no specific area or member of staff is used exclusively on non-business research. It therefore isn’t possible to use any of the methods quoted above.
Of the 275 staff employed, 75 work 90 per cent of the time on non-business work, 150 are researchers engaged 75 per cent of the time on non-business research and the remaining 50 staff provide technical and administrative support equally to the researchers.
Full-time equivalent of staff engaged on non-business research equals (75 multiplied by 90 per cent) plus (150 multiplied by 75 per cent), which is 67.5 plus 112.5, which equals 180.
Therefore the percentage of researchers time that is spent on non-business research is 180 divided by 225 equalling 80.
Since the support staff equally supports the researchers, 80 per cent of their time must also be spent on non-business work.
Percentage qualifying use equals 80.
Qualifying use is less than 95 per cent therefore the building is NOT eligible for the zero rate using this method.
Another potentially acceptable method of calculating percentage qualifying use could be, in a similar scenario to Example 1, to compare commercial funding of the use of the building to the total funding of the use of the building. However, where funding is used (funding would include all income including grants donations and so on), it would only likely give a fair answer where the costs of using the building for non-business activity are similar for business activity.
For example, if 98 per cent of the funding comes from a non-business source, but only 20 per cent of the building is physically used for a non-business activity, this method wouldn’t be fair as it doesn’t fairly reflect how the building is physically used. We would expect that, to be seen as fairly representative, if 98 per cent of the income is non-business, 98 per cent of the building would physically be used in non-business activities.
It is important to remember when considering calculations based on funding, that it is the funding of the ongoing activity in the building which needs to be considered and not how the construction is funded. For example, a building wholly funded by donations still won’t qualify for relief under this method if the ongoing activities to be undertaken in the building produce more than 5 per cent of the annual income for the building.
A research laboratory will be used on a mixture of commercial and non-commercial research. There is no difference in the ways that the two types of research are carried out. Commercial clients will pay 3 per cent of the research costs.
Percentage qualifying use equals 97.
Qualifying use is greater than 95 per cent therefore the building IS eligible for the zero rate.
A school building contains a sports hall. The sports hall is 10 per cent of the total floor area of the building. When the hall isn’t available for use by the school, it is hired to the local sports centre in the evenings and at weekends during term-time.
The school is open from 7am to 7pm weekdays during term-time (60 hours weekly). The hall is hired by the sports centre from 7pm to 10pm weekday evenings and 11am to 5pm on Saturdays and Sundays (27 hours weekly).
The sports hall is only available to clubs and organisations so it isn’t possible to calculate actual users of the hall and thus use a headcount method.
Under a floor space method, the school building is being used 90 per cent for a qualifying purpose and so isn’t eligible for the zero rate (although the building less the sports hall will be eligible).
Under a time-based method, as the school building is only being used in term time, a representative period is one week. In one week, the school building is available to be used for 87 hours, 60 of which are for a qualifying purpose. Percentage use is 60 divided by 87 multiplied by 100 - that is, 69 per cent for a qualifying purpose and so the building isn’t eligible for the zero rate.
Under a hybrid method combining floor space and time, 90 per cent of the building is being used 69 per cent of the time for a qualifying purpose. Therefore, overall, the building is being used 95.2 per cent for a qualifying purpose, calculated as follows:
A divided by (A plus B) multiplied 100 equals the percentage qualifying use of building where:
A is the percentage of building used solely for qualifying purpose (90) multiplied by the percentage of time used for qualifying purpose (69) - that is, 62.1
B is the percentage of building not used solely for qualifying purpose (10) multiplied by the percentage of time not used for qualifying purpose (31) - that is, 3.1.
In other words, 62.1 divided by 65.2 multiplied by 100 equalling 95.2.
Qualifying use is greater than 95 per cent, therefore the building is eligible for the zero rate.
A university constructs a new research building with an area of 4,300 square metres. 96 per cent of the research will be funded by non-business grants and donations, the remainder will be commercially funded. The building won’t be used entirely for research purposes. 300 square metres (7 per cent of the area of the building) will also be used as a lecture theatre, not only for briefing research staff (5 per cent of the time) but also for teaching (10 per cent of the time) and free public lectures (1 per cent of the time). The rest of the time, the theatre won’t be used. The part of the building to be used for research purposes will be used for those purposes all of the time.
In other words, 93 per cent of the building (the area of the building less the lecture theatre) will be used 96 per cent for a qualifying purpose (and will be eligible for the zero rate) and 7 per cent of the building (the lecture theatre) will be used less than 95 per cent for a qualifying purpose (and would be ineligible for the zero rate).
However, it would be acceptable to use a hybrid method combining area and time. In this method, 100 per cent of the building will be used 95.3 per cent for a qualifying purpose and the whole building will therefore be eligible for the zero rate.
Claimants must remember that all parts of a relevant building must have a relevant use. If the lecture theatre was only intended to be used for business purposes, then the zero rate could never apply to that part of the building.
Percentage qualifying use is calculated as follows:
|Area and usage||Calculation||Business||Non-business|
|Teaching use||300 square metres|
|10 per cent||30 square metres|
|Research use||300 square metres|
5 per cent
|4 per cent||0.6 square metres|
|Research use||300 square metres|
5 per cent
|96 per cent||14.4 square metres|
|Free public lectures||300 square metres|
|1 per cent||3 square metres|
|Research use||4,000 square metres|
|4 per cent||160 square metres|
|Research use||4,000 square metres|
|96 per cent||3,840 square metres|
|TOTAL||190.6 square metres||3,857.4 square metres|
Percentage qualifying use of the whole building is 3857.4 divided by 3857.4 plus 190.6) multiplied by 100 per cent equalling 95.3.
Qualifying use is greater than 95 per cent, therefore the building IS eligible for the zero rate.
Note: This list of methods of calculation is not exhaustive and is necessarily simplistic for illustration purposes. Other comparison methods can be used so long as they fairly reflect the intended use of the building.