15 Oct 2018

HMRC’s guidance is free but do you get what you pay for?


The Office of Tax Simplification has just issued a report calling on HMRC to improve the quality of its guidance to taxpayers. A key recommendation is that HMRC should be clearer about the reliance taxpayers can place on it.

A recent case involving the Roman Catholic Diocese of Westminster illustrates that, despite carefully considering HMRC’s guidance, taxpayers can still face challenges when HMRC take a position that isn’t as the taxpayer expected.

The case sent to Tribunal

Following the amalgamation of several churches, the Diocese decided to remodel St Joseph’s church, Stevenage to accommodate an increased congregation. Prior to the work, the church had internal walls to divide off an area for use as a meeting room and hall.

The works increased the footprint, thus allowing the hall to be moved to a new space at the side of the church. The hall was separated from the area used for worship by an internal wall, and had its own main entrance, kitchen and toilets. Most of the building work was subject to VAT at 20%, but the Diocese contended that the work to create the space for the hall should be zero-rated, as the construction of an independent annexe used for qualifying charitable purposes.

The Diocese had carefully considered HMRC’s published guidance and had concluded that the Hall was an annexe capable of functioning independently. It noted the specific example given by HMRC of “… a church hall added to an existing church.”

However, HMRC argued that the hall was simply an extension to an existing building, that did not amount to an annexe, and thus that part of the building work was subject to VAT. In particular, prior to the work being carried out, there was a church and an area allocated for use as a hall, afterward the accommodation comprised a larger church and larger hall.

Further, in order to satisfy the planners, the design of the hall and the materials used were a close match to the existing structure, the hall was integrated into the overall building so the impression was of a single, extended building rather than existing an annexe.

The Tribunal decided that, on balance the hall met the definition of an annexe.

HMRC’s secondary argument was that the annexe was not independent. While accepting that the hall had a separate main entrance, plus its own toilet and kitchen, HMRC relied upon the fact that the boiler for the hall was located in the main church building. This was separate to the boiler for the church itself, and the controls for the hall’s own heating system were in the hall, not the church.

The Tribunal decided that the location of the boiler was irrelevant. Users of the hall could control the temperature in the hall from the hall, without accessing the main church building. All in all, the hall was independent of the church.

Role of HMRC’s guidance

The Tribunal based its decision on the law. The Tribunal found against HMRC on the facts of this case. It is not clear whether HMRC intend to Appeal.
Had the Diocese lost (or if it loses any future Appeal by HMRC) it may need judicial review proceedings to pursue the argument that HMRC’s guidance gave it a legitimate expectation that zero-rating should apply.

A difficulty could be that some parts of the guidance are reflected in how HMRC argued this case, and some are not.

HMRC’s guidance did give the example of providing extra space for activities already carried out in the existing building as something that, in HMRC’s opinion, was not an annexe.

HMRC’s guidance does not reflect its typical argument (as in this case) that if an annexe looks like the existing building, it is an extension and not an annexe.
In relation to the “independent” issue over the heating, the Diocese had carefully considered HMRC’s guidance and in particular the following section (emphasis added):

“An annexe is capable of functioning independently when the activities in the annexe can be carried on without reliance on the existing building. You can ignore the existence of building services (electricity and water supplies) that are shared with the existing building.”

Strictly, the guidance gives the specific example of electricity and water, rather than heating, but in the context that shared building services could be ignored.
The judge in a previous case (Chelmsford College) commented that heating arrangements might be relevant to whether an annexe is independent. In my view, if HMRC does think that heating arrangements are a fundamental issue its guidance should clearly say so.


The OTS report makes several helpful recommendations as to how current HMRC guidance could be improved. As a Tax Adviser I don’t see this as a commercial threat, rather, I welcome a situation where clients have more confidence over when they do, or do not, need to take professional advice.

From my perspective, the most important issue is for the guidance to set out HMRC’s up to date position on given issues. A taxpayer needs to be clear on whether its interpretation of the legislation and caselaw is acceptable to HMRC or is liable to challenge. A reliable mechanism for obtaining advance clearance in cases of genuine doubt wouldn’t go amiss either.

In the meantime, there is always your local expert tax advisor…

To discuss this matter or anything else, please call Steve Chamberlain on 01225 472800 or send him an email.