Budget 2016

Increased VAT registration and deregistration thresholds

The VAT registration threshold is to increase from £82,000 to £83,000 and the VAT deregistration threshold is to increase from £80,000 to £81,000. These changes will be effective from 1 April 2016.

Extension of VAT Refund Scheme for Museums and Galleries

The government announced that it will broaden the eligibility criteria for the VAT refund scheme for museums and galleries. Guidance on the new criteria has been published. The extension will enable support to a wider range of free museums from across the UK.

VAT refunds for shared services

The government has confirmed it will legislate to enable named non-departmental and similar bodies to claim a refund of the VAT they incur as part of a shared service arrangement used to support their non-business activities, to encourage public bodies to share back-office services, where this results in efficiencies of scale.

Isle of Man charities

The government is to legislate to ensure charities subject to the jurisdiction of the High Court of the Isle of Man are capable of qualifying for UK VAT charity reliefs.

Welfare exemption – serviced residence

The Belgian case of Les Jardins de Jouvence (LJJ) was recently heard before the Court of Justice of the European Union (CJEU). In October 2004 LJJ informed the Belgian tax authorities of the commencement of its business activity renting out small flats designed for able-bodied persons aged 60 and over. The Belgian tax authorities registered LJJ for VAT purposes.

In October 2006 LJJ received a provisional licence to operate the serviced residence. The serviced residence makes available to its occupants dwellings intended for one or two persons, including a fitted kitchen, sitting room, bedroom and bathroom. In addition, the residents have access to various services for payment including hairdressing salon, restaurant, physiotherapy, laundry and pharmacy.

Between August 2004 and September 2006 LJJ carried out substantial building work and recovered the VAT incurred in relation to the works. Following a VAT audit by the tax authorities in November 2006 it concluded that LJJ was not entitled to recover the VAT incurred. This is because the supply of serviced residence and associated services is a welfare supply and VAT exempt. The tax authorities cancelled LJJ’s VAT registration and a demand for payment of over-claimed VAT was served on LJJ. LJJ appealed and questions were referred to the CJEU.

The questions before the CJEU were:

• Is a serviced residence which operates with a view to profit together with a range of optional services supplied in return for payment (those services not being exclusively available to the occupants of the serviced residence) a charitable organisation which supplies services and goods closely linked to welfare and social security work?
• Is the answer to question (1) different if the serviced residence receives subsidies or any form of funding from public authorities.

The EU legislation applies VAT exemption to, “the supply of services and goods closely linked to welfare and social security work, including those supplied by old people’s homes, by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned”.

LJJ is not a body governed by public law. It is therefore necessary to consider whether LJJ falls within the concept of ‘other organisations recognised as charitable by the Member State concerned’. The CJEU placed relevance on the licence obtained to operate the serviced residence and the fact that serviced residences apply prices set under the supervision of the Minister for Economic Affairs; however, the CJEU found that it was for the national court to determine whether LJJ was charitable for the purposes of the welfare VAT exemption.

The CJEU found that it was irrelevant for the purposes of the welfare VAT exemption whether or not LJJ receives a subsidy or financial support from public authorities.

With regards to the optional services provided (hairdressing, restaurant etc.) it was again for the national court to determine whether these are VAT exempt welfare services. Some of the optional services may be regarded as closely linked to welfare; however, with regards to some of the optional services (hairdressing for example) it does not appear to be a requirement of national legislation to offer these services with serviced accommodation. Where services are not essential to the main supply these will not be VAT exempt welfare.

Membership subscriptions & apportionment of certain benefits by non-profit making bodies

The Shanklin Conservative and Unionist Club (the Club) submitted a claim for repayment of overpaid output tax. It claimed its membership fees were exempt from VAT as it is a non-profit making body with objects in the public domain and of a political nature. HMRC argued that the Club was not eligible for the VAT exemption because its main focus was on social and leisure activities rather than political activity. This was a lead case with the appeals of four other Conservative clubs stayed behind it.

The Tribunal dismissed the Club’s appeal. The Tribunal considered the Club’s supply of membership to be a single supply that was social, rather than political, and therefore subject to VAT at the standard rate. It’s supplies to its members did not qualify for VAT exemption, as some charities do due to their philanthropic aims and objectives.

The Tribunal found that it did not have jurisdiction to decide whether the Club could rely on Extra Statutory Concession 3.35 (ESC 3.35), which allows certain non-profit making bodies to apportion subscriptions to reflect the VAT liability of benefits supplied; however, it commented on the application of the concession.

ESC 3.35 was introduced in 2000 when HMRC changed its policy regarding membership subscriptions, and supplies to members, by certain non-profit making organisations. HMRC had been incorrect in law in allowing membership organisations to apportion their subscriptions according to benefits received. However, HMRC continued to allow apportionment under the terms of ESC 3.35.

HMRC’s position is that although ESC 3.35 permits exemption of a part of a single supply, the VAT exemption for supplies by a non-profit making body to its members only applies where the requisite aim (in this case political) is the main or principal aim of the taxpayer. Therefore, where the requisite aim is not the main aim of the taxpayer that supply cannot be VAT exempt under ESC 3.35. The Tribunal agreed with the Club that HMRC’s position makes no sense. If the effect of ESC 3.35 is to split a single supply into multiple supplies then, if an element that is principally referable to political aims is split from the single supply and treated as a supply in its own right, that supply would be VAT exempt.

This is an interesting comment by the Tribunal. It may provide scope for not-for-profit membership organisations to revisit its supplies to members and membership apportionment for VAT purposes. It should also be remembered that HMRC’s position (as demonstrated in the Serpentine Gallery case) is that ESC 3.35 can only apply in circumstances where members enjoy voting rights.

Repayment supplement

A repayment supplement is a sum payable by HMRC usually where a legitimate VAT repayment claim has not been authorised by HMRC within 30 days. In the case of Shaun David Corrigan the taxpayer calculated it took between 36 days and 39 days to authorise his VAT repayment return. HMRC argued that the VAT return was authorised between 26 and 29 days and was made within time. HMRC contended it made reasonable enquiries and there was dispute between the parties as to when the enquiry began; however, the Tribunal found in the taxpayer’s favour.

Repayment supplement is payable at 5% of the amount due or £50, whichever is greater. If a charity has had a VAT refund VAT return payment delayed beyond 30 days by HMRC it may wish to consider requesting a repayment supplement.

Interest following official error

Section 78(1)(a) VAT Act 1994 provides that where, due to an error on the part of HMRC, a taxpayer accounts for output tax incorrectly or failed to claim an amount due as input tax HMRC shall pay interest.

HMRC may be reluctant to pay interest, this is evidenced in the case of Avicenna Centre for Chinese Medicine Ltd. The taxpayer in this case is not a registered charity; however, the principles are important and apply equally to the third sector as to commercial organisations.

The taxpayer’s business includes supplying herbal teas. The teas are prescribed to customers after consultation with a practitioner of traditional Chinese medicine. Following a Tribunal decision in 1995 (which HMRC lost) HMRC accepted herbal teas qualified for zero-rating when sold at a homeopathic clinic. However, supplies of herbal teas had been accepted by law as zero-rated many years prior to the 1995 case in Dr Xu Hua. This confirmed when herbal teas were prescribed for a medical reason this was a zero-rated supply.

In summer 1994 the taxpayer wrote to HMRC requesting advice in relation to establishing the correct VAT liability of its supplies. HMRC confirmed supplies were standard rated. In May 2004 HMRC carried out a VAT audit of the taxpayer’s VAT accounting records but did not advise it that output VAT was being incorrectly accounted for. In 2008 the taxpayer contacted HMRC’s helpline and was again told its supplies of herbal teas were standard rated.

In January 2014 the taxpayer wrote to HMRC on this matter and a meeting took place the following March. It was agreed that supplies of herbal teas were zero-rated. HMRC also agreed that because the taxpayer had absorbed the VAT accounted for in its pricing i.e. it had not passed on the VAT charge to its customers but borne the cost, unjust enrichment did not apply.

The taxpayer submitted a retrospective VAT refund claim in respect of output VAT paid in error dating back to 1995. Due to capping legislation HMRC only refunded VAT overpaid from 1 January 2010 and repaid VAT of £303k in May 2014. The taxpayer requested payment of interest on the whole VAT sum refunded due to official error, HMRC refused. HMRC did not accept that HMRC had made an error and paid interest of £45.72 due to processing delays. HMRC’s refusal to accept responsibility for its actions in this case seem odd when considering the burdens placed on taxpayers, including charities. The taxpayer accounted for output VAT unnecessarily for over 20 years and due to capping law was unable to reclaim VAT from HMRC which it had wrongly paid from 1 July 1994 to 31 December 2009, a period of 14 ½ years.

The Tribunal decision does not record the amount of the claim which was blocked; however, if the four year period refunded was in excess of £300k VAT then this suggests significant sums were likely to have been paid to HMRC in error.

The Tribunal concluded ‘whilst HMRC do not ordinarily have a duty to advise a taxpayer of his liability to VAT this changes if a taxpayer specifically asks them for such advice’. The Tribunal found that during the VAT inspection of May 2004 the taxpayer specifically asked the visiting officer for advice on the VAT liability of the supplies of herbal teas. The officer confirmed VAT was accounted for correctly and this appeared to be reflected in the officer’s report of the inspection which noted “lower than expected output tax” and “in-depth checks made”. Therefore, the taxpayer was entitled to interest.

Where there are matters of ambiguity (charities often deal with complex areas of VAT) corresponding with HMRC may be necessary to deliver certainty. If a charity feels that it has been misdirected by HMRC this case demonstrates that, if the sums involved warrant it, a claim for interest may be worthwhile.

Forthcoming hearings

Caithness Rugby Football Club is due to be heard before the Upper Tribunal on 12 April 2016. The First Tier Tribunal decided in favour of Caithness. HMRC appealed.

The First Tier Tribunal found that the construction of a new clubhouse was used ‘as a village hall or similarl in providing social or recreational facilities for a local community’. We understand that Caithness is a lead case with several cases stood behind it awaiting the outcome of the Upper Tribunal with interest.

Constable VAT Consultancy LLP is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities to regionally based organisations. Constable VAT has a nationwide client base.

We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC.

If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry,  Laura Krickova or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@constablevat.com, laura.krickova@constablevat.com and  sophie.cox@constablevat.com.  Alternatively, please visit our website at www.constablevat.com where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates.

Visit our website for current news updates. You can also follow Constable VAT on Twitter.

 This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC News

Revenue & Customs Brief 03/16

Review of VAT grouping provisions following the CJEU judgments in Larentia + Minerva and Marenave (C-108/14 and C-109/14) and Skandia (C-713). Following on from these judgments the government expects to make changes to UK law and VAT grouping provisions. These changes may include: extending VAT grouping to non-corporate bodies and new rules replacing the current ‘control’ test based on company law.

These changes may offer some charitable trusts the opportunity to form a VAT group with their trading subsidiaries.

Case Update

 First Tier Tribunal

 Whether option to tax disapplied

HMRC raised an assessment in the sum of £133,333.33 for output VAT due on the sale of a property against the seller, the Trustees of the Book Production Consultants Retirement and Death Benefit Scheme. The Institute for Orthodox Christian Studies (the charity), as a third party (the purchaser), appealed HMRC’s decision to assess. The assessment was issued following HMRC’s decision that the charity’s declaration, that it intended to use the property for ‘relevant charitable purposes’, was incorrect and therefore invalid. ‘Relevant charitable purposes’ means use by a charity otherwise than in the course or furtherance of business. The seller had opted to tax the property, which meant it was required to charge output VAT on the sale, unless its option to tax was disapplied.

The charity argued that the property was used in the fulfilment of its charitable objectives. Although it charges fees for courses these are subsidised by grants and donations, and it only lets out rooms for a limited period and so could not reasonably be said to have been engaged in a business activity. HMRC contended that the rental of the property by the charity constitutes a business use, as such the declaration was invalid and the seller’s option to tax could not be disapplied.

HMRC accepted that the greater part of the charity’s activities involved carrying out charitable activities. Donations supplemented the charity’s operational expenses and funded the purchase of the property. The charity was not conducted on sound and recognised business principles in view of its reliance on volunteers and donations. However, although the charity relies heavily on its supporters, the fees it receives cannot be regarded as anything other than consideration for teaching and other supplies it makes. The renting of rooms was also found to be a business activity. The charity’s appeal was dismissed and HMRC’s assessment for output tax due on the sale of the property was upheld.

Relevant charitable purpose – zero-rate certificates

The French Education Property Trust Limited (“FEPT”), was a registered charity which purchased and renovated a listed property. It issued VAT zero-rate certificates to contractors on the basis that the property was to be used otherwise than in the course or furtherance of business. It subsequently leased the property to another charity, the College Français Bilingue de Londres (“CFBL”). FEPT set the rent charged to CFBL to cover costs and did not make a profit.

The issue was whether the property was solely to be used otherwise than in the course or furtherance of a business.

HMRC formed the view that FEPT was not entitled to issue the zero-rate certificates because FEPT intended to lease the property to CFBL for use as a fee-paying school.

The Tribunal considered that the correct approach to analyse the case was to consider first FEPT’s letting of the property to CFBL and then the property’s use by CFBL.

The Tribunal referred to EU legislation, which provides that the exploitation of tangible property for the purposes of obtaining income on a continuing basis shall in particular be regarded as an economic activity. The Tribunal concluded that a lease at below market rate was the exploitation of a property.

The fact that there was no profit motive did not mean that there was no economic activity. The amount that FEPT intended to charge could not be considered, in any sense, a concessionary rent.

Furthermore, parents were contractually obliged to pay the fees charged by CFBL. This was relevant to the issue of whether CFBL was making supplies to customers for a consideration. The fees charged by CFBL were also below the market rate charged by independent fee-paying schools and the Tribunal agreed that CFBL was not aiming to make a surplus on its operations. However, although this could indicate that there was no economic activity, it was not determinative.

The Tribunal found that CFBL was a professionally-run, well-managed school with fee income of over £4m paid in exchange for the provision of education. The activity of the running CFBL did not fall outside the “very wide” meaning to be given to the term “economic activity”.

The appeal was dismissed. FEPT was not entitled to issue the zero-rate certificates.

Upper Tribunal

Relevant charitable purpose

HMRC appealed against the First Tier Tribunal’s decision in Wakefield College. The appeal relates to the supply to the College of construction services in relation to a new building for the College. HMRC refused to authorise the issue by the College to the builders of a zero-rating certificate. Use for a relevant charitable purpose means use by a charity otherwise than in the course or furtherance of business. It is common ground that the College is a charity and the provision of further and higher education is capable of amounting to a relevant charitable purpose. HMRC’s position, and the reason why construction services cannot be zero-rated, is that some of the College’s supplies of further and higher education are made in the course or furtherance of business.

The Upper Tribunal found that the fact students were charged less than the cost of the supply (because the course was part-funded by a grant) did not mean that the fees charged to students did not amount to consideration for the supply. There was a direct link between the payment made by the student and the supply. It follows that the College’s supplies to the students were made in the course or furtherance of business and the construction services cannot be zero-rated.

It is interesting to note that although the decision in Wakefield College went against the taxpayer the Upper Tribunal recommended that the legislation be revisited. The Upper Tribunal said, “It cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse.”

The two above cases (French Education Property Trust and Wakefield College) are interesting decisions when compared to ongoing litigation in cases such as Longridge on the Thames. The issue before the Tribunal in Longridge was whether the charity should pay VAT on the construction of a new training facility. The charity argued that the building would be used for relevant charitable purposes and therefore construction services should be zero-rated. HMRC disagreed because the charity charged fees for its activities. HMRC has lost this case before the First Tier Tribunal and the Upper Tribunal. HMRC has lodged an appeal with the Court of Appeal which is due to be heard this year.

VAT exemption for membership subscriptions

The United Grand Lodge of England (“UGLE”) appealed against the decision of the First Tier Tribunal that its aims were not of a “philosophical, philanthropic or civic nature” for the purposes of the VAT exemption in Article 132(1)(l) because it also had other aims. UGLE contended that its main aim was to promote the practice of Freemasonry, which was philosophical, philanthropic and civic in nature.

It was accepted as common ground that UGLE was a non-profit making institution whose supplies were in its members’ common interest in return for subscriptions. However, the Upper Tribunal found that the FTT had not erred in law by inferring from the way in which charitable donations were applied that not all of UGLE’s promotion of charitable giving had a philanthropic aim. Given that around 75% of charitable spending was directed to Masons or their dependents taken together with the evidence that the interests of family members were paramount, it could not be said that its decision was perverse. Furthermore, the FTT was entitled on the evidence to find that the charitable activities of Freemasons were largely unrelated to any relationship of citizens with the state. The appeal was dismissed.

Court of Justice of the European Union

 The Court of Appeal has referred the case of Brockenhurst College to the Court of Justice of the European Union (CJEU). The college teaches catering and performing arts. The college ran a restaurant in which the catering functions were undertaken by students. Meals were charged at 80% of the costs. Performance arts students staged concerts and performances to paying member of the public. This issue is whether supplies of restaurant and entertainment services were VAT exempt because they are closely related to VAT exempt supplies of education.

Constable VAT Consultancy LLP is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities to regionally based organisations. Constable VAT has a nationwide client base.

 We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC.

 If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry,  Laura Krickova or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@constablevat.com, laura.krickova@constablevat.com and  sophie.cox@constablevat.com.  Alternatively, please visit our website at www.constablevat.comwhere you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow Constable VAT on Twitter.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.