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.
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.
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.
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