Constable VAT & Charities Newsletter August 2019

Thank you for subscribing to our VAT Charity Newsletter. In this publication we cover some of the most important and interesting areas of VAT for charities. Some of the issues and cases have been discussed in our VAT Focuses, however the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector. There are some case law developments which may have an impact on the recovery of VAT incurred by all VAT registered charities.

This issue of the Constable VAT & Charities Newsletter covers;

  1. VAT Welfare Exemption: Supplies Closely Connected
  2. University of Cambridge
  3. Partial Exemption “Direct and Immediate Link”
  4. Zero-Rating Construction: Relevant Charitable Purpose, Business or Non-Business
  5. Glasgow School of Art
  6. Call for Evidence: Simplification of Partial Exemption and the Capital Goods Scheme

1. VAT Welfare Exemption: Supplies Closely Connected

This appeal concerned Cheshire Centre for Independent Living (CCIL) and the liability of its supplies of payroll services to individuals with disabilities, which it believed to be VAT exempt. HMRC had ruled that the payroll services did not qualify for exemption as they were not closely associated with the provision of welfare services so they were liable to VAT at the standard rate.

Certain disabled persons may be eligible for financial assistance from the Government in order to facilitate their independent living. The funding is handled in one of three ways;

  • The money is held and controlled by the Local Authority or NHS
  • The money is paid to a special organisation whose purpose is to receive and control funds for those people receiving funding for welfare
  • The money is paid to the individual directly, affording a higher degree of autonomy in determining the individual’s own care.

In this instance, the funding is handed to disabled individuals directly in order for the individual to take control of and pay for their own care and support services. Where a disabled person receives these payments and uses them to pay personal assistants, they become an employer of that person with all the relevant obligations for direct tax purposes.

CCIL offer a payroll service. It enters into contracts with local authorities and individuals receiving funds for their care and deals with issues such as PAYE and NIC on behalf of clients. CCIL contended that this supply should benefit from VAT exemption as it is closely associated with a supply of welfare services. HMRC believed that this supply was secondary to a supply of welfare services and, therefore, should be standard rated as a “payroll service” akin to that which may be supplied by an accountant. This would, of course, have taken away 20% of the payments made to disabled individuals to support their independent living. Simply put, the individuals would have been left with less money to spend on receiving the support they need.

CCIL submitted that the services supplied were in the context of a supply by a charity to a disabled person whose needs had been formally assessed under the Care Act 2014, meaning that they were VAT exempt. The supplies in dispute, it claimed, were in the context of a supply by a charity to a disabled person, not a supply of payroll services to a regular employer. It was observed that the disabled individuals were de facto employers by way of their disability, not because they were seeking to employ people for their own profit.

The Tribunal considered that the payroll service, whilst not being an end in itself, is a means for enabling the support of disabled individuals through the services of assistants as a part of the care plan for that individual. It observed that, in previous caselaw, that it had been found that psychotherapeutic treatment given in out-patient facilities by qualified psychologists (who are not doctors) is an exempt activity, but only when closely related to hospital care. It pondered, therefore, whether or not CCIL’s supplies could be capable of being a “stand alone” service which would be standard rated. The Tribunal concluded that the supply was not a stand-alone supply, nor was it really capable of being one. Therefore, it allowed the appeal and stated that the services in question were indeed exempt as they were services closely connected with a supply of welfare services.

Constable Comment: Interestingly this case focusses on funding provided directly to the disabled person but it acknowledges at least two other ways in which these funds are distributed; the money is held and distributed by the NHS or, alternatively, by an independent third party.

The VAT liability of similar services provided in these circumstances is not commented on in this case. Despite this, the result will, no doubt, create some uncertainty as to the VAT liability of the funds received by the charities on behalf of the disabled person. The treatment of such supplies and what constitutes “closely linked with a supply of welfare services” now requires clarification as it could have wide ranging impacts on a variety of service providers dealing with welfare. The Tribunal Chairman comments that The VAT position of supplies by the Appellant to Local Authorities is not before the Tribunal.” The issue was whether payroll service provided by the charity to the recipients of Direct Payments is exempt for VAT purposes. This point is not elaborated on, but it is not clear why there should be a difference in VAT treatment.

This case also serves as a reminder that HMRC construes the welfare exemption, amongst others, very narrowly. It is always recommended that, when seeking to rely on a VAT exemption, professional advice should be sought.

A final point of interest is that it took 6 years for this case to be heard. HMRC issued its decision in January 2013 and the case was heard over two days in January 2019. Constable VAT has been advised by HMRC Solicitor’s Office that The Commissioners have sought leave to appeal the decision of the First Tier tribunal to the Upper Tribunal.

2. University of Cambridge

This case concerned the deductibility of VAT incurred by the University of Cambridge in relation to fees incurred on investment management. The University receives donations and endowments as part of its financing, when these payments are received, the amounts are paid into an investment fund which is managed by a third-party fund manager. The University submitted an application to recover this input VAT as, it believed, the income generated was used to fund the whole range of its activities. Therefore, the input VAT was reclaimable in line with the University’s partial exemption as a general overhead.

The FTT and UT had found in favour of the University. The Court of Appeal referred the matter to the CJEU for clarification as to whether a taxable person, carrying on both taxable and exempt activities, invests donations received by placing them into a fund and uses the income generated to cover the costs of all of its activities is entitled to deduct as an overhead input VAT paid in respect of the costs associated with that investment.

Only activities which are economic in nature give rise to a right to deduct VAT incurred and, moreover, in order for a taxable person to have a right to deduct VAT, there must be a direct and immediate link between a particular input and output transaction. Therefore, the Court observed that it is necessary to determine whether the collection of donations, and their subsequent investment, constitutes an economic activity.

Reflecting on this point, the Court posited that, when collecting donations, the University is not acting as a taxable person as there is no supply in return for a consideration. It follows that the input VAT paid in respect of any costs incurred in connection with the collection of donations is not deductible. For VAT purposes, there is no regard paid to the reason why the money was received. Therefore, the VAT was not recoverable by the University.

Constable Comment: This decision deals with the matter of the recovery of VAT incurred on investment management fees. The key point is whether a charity can consider the costs as an overhead of its business activities or solely a direct cost of a non-business investment activity. In this case, the CJEU found that the costs were not an overhead of charitable activities but were directly related to the non-business investment activity and not the making of any taxable supplies.

We understand that some charities had submitted protective input VAT claims on the basis of the First and Upper Tier Tribunal decisions in this case. Those charities may now wish to reconsider the position and may feel it appropriate to notify HMRC of an error correction. HMRC may pursue and issue VAT assessments against charities who have been making partial input VAT claims on investment management fees.

Whilst this decision concentrates on a narrow point, there is obviously concern about the possible broader effect this decision may have on HMRC policy. Following the High Court decision in Church of England Children’s Society in 2005 (and HMRC Business Brief 19/05) there has been an assumption that where VAT has been incurred on fundraising costs, that VAT is partially recoverable via the agreed input VAT recovery method on the basis that the funds are not restricted to support only non-business or VAT exempt business supplies but are also supporting taxable business activities.

This firm confirmed with HMRC in 2011 that this principle still applied. The CJEU decision in this case may cause HMRC to revisit the position and we would recommend all charities claiming VAT incurred on fundraising costs refresh their specific circumstances.

3. Partial Exemption – “Direct and Immediate Link”: Royal Opera House Covent Garden Foundation

This case concerned the recoverability of VAT incurred by the Royal Opera House Covent Garden Foundation (The Foundation) in relation to productions which it put on and charged for admission to. It was accepted that admission to the events was exempt for VAT purposes owing to the cultural exemption. However, the Foundation sought to argue that some of its production costs had a direct and immediate link with taxable supplies it made, such as catering income and ice cream sales, meaning that some of the VAT incurred should be recoverable as it related, in part, to taxable supplies being made.

The issue which arose was whether costs incurred had a direct and immediate link with the following, taxable, supplies:

  • Catering Income
  • Shop income
  • Commercial Venue hire
  • Production work for other companies
  • Ice cream sales

If there were such a link found then the costs would have been residual for partial exemption purposes meaning that a percentage of the input VAT could be recovered in line with the percentage of the overall supplies made by the Foundation which were taxable: 30% taxable sales would lead to 30% input VAT recovery on residual input VAT.

The Court observed that, as per case law, the decisive factor in determining a direct and immediate link is that the cost of the input transaction, in this case the production costs, is incorporated in the cost of the individual output transaction, in this case the taxable supplies. Each type of taxable supply was assessed individually in order to establish whether the production costs were incorporated into the supplies.

Catering income was found to have a direct and immediate link with the production costs, a conclusion aided by the fact that restaurant menus for more expensive evenings are set at higher prices. It was also concluded that for ice cream sales, similarly to supplies of catering, there is a direct and immediate link. Therefore, The Foundation will be able to treat the income VAT associated with these supplies as residual for the purposes of partial exemption; put simply, it can now recover more input VAT.

However, not every conclusion went in favour of The Foundation. Where the supplies of catering and ice cream sales were largely dependent on the productions being staged by the Foundation, and the costs were incorporated into the price of attending the event, the shop sales, commercial venue hire and production work for other companies were found not to be. It was considered that the costs of production were not “bundled” into the income derived from these streams. Therefore, there is not a sufficient link between the production costs and these taxable supplies to give rise to input VAT recovery as they relate to the exempt supply of admission to a cultural event.

Constable Comment: Where previous case law has observed that a direct and immediate link is established simply through the bundling of costs into the ultimate charge made to the consumer, this case was interesting in seeming to deviate somewhat from this precedent; assessing more where there is a business link between the cost and the supply.

For example, with regard to the catering, it was observed that few people would attend the Royal Opera House merely to eat dinner. People ate there as part of their evening and would not, but for the performance, be buying food in that restaurant. The logic for the ice cream sales was the same despite there being little discussion around the income from ice cream containing an element of the cost of the production.

Whilst this was not a total victory for the Foundation, the decision heralds a welcome shift away from HMRC’s rigid application of the “direct and immediate” criteria that costs be bundled into the final charge to the consumer. We await to see if HMRC will appeal this decision further.  

4. Zero-Rating Construction: Relevant Charitable Purpose, Business or Non-Business

This case concerned the VAT liability of construction costs incurred by Yeshivas Lubavitch Manchester (YLM) when constructing a new building for its school to use. YLM owns and maintains Oholei Yosef Yitzchok (OYY), which provides a day nursery for boys and girls between the ages of 3 and 5 and a day school for girls aged 5 – 16.

YLM acquired a site, which was previously a residential building, and added a new single-storey area to the rear of the building, only some minor works were carried out to the existing structure. The new building and old building did not use the same party wall; they were built slightly apart from each other and then the external walls were used to create internal corridors. YLM argued that the construction of the new structure was zero-rated under items 2 and 4 of Group 5, Schedule 8 VATA 1994. HMRC contended that the work should be standard rated as it was performed under a single contract for converting the old building. HMRC also disputed whether the building was for a “relevant charitable purpose” for the zero-rate to apply as YLM received money from parents in exchange for providing a children’s nursery.

HMRC sought to argue that the work undertaken was performed under one contract by a single contractor, that a shared boiler meant the new building and existing structure were incapable of functioning separately (a criteria for the zero-rate to apply) and that the use of the building would be a business use rather than a non-business charitable one. Readers may remember the decisions in both Yarburgh and St Pauls, which led to HMRC’s Business Brief 02/05, commenting on whether charities which offer nurseries/creches would be regarded as being in business for VAT. HMRC believed that this was not applicable in the present case as OYY also provided a day school and OYY ran things differently to the way Yarburgh did.

In its deliberating, the Tribunal considered that the point regarding the single contract did not prevent the application of the zero-rate as there is no legislative provision which insists a single construction contract cannot relate to two independent projects on the same site. Therefore, the question revolved around whether or not YLM were found to be in business through operating OYY.

The Tribunal considered a wealth of caselaw to establish whether YLM/OYY was in business. In considering Wakefield (our coverage here), the Tribunal observed that HMRC accept that up to 5% business use of a building can be ignored as de minimis.   It was accepted that any office use of the building would be less than 5% of the overall use of the building so, following Wakefield, the question was whether or not OYY were in business purely through operating the nursery. Various factors were weighed against each other to establish if the nursery was run “in return for remuneration”.

After significant consideration the Tribunal reached the conclusion that the nursery was not a business activity and, therefore, that the construction work qualified for the zero-rate of VAT. However, it was also confirmed that any work which was carried out to the existing structure should be standard rated. The key factors in concluding as it did seem to be that the nursery is run on a not for profit basis. A “significant number” of children using the charity’s services are from disadvantaged families. In November 2018 a total of 36% of parents were paying reduced or subsidised fees.

Constable Comment: The conclusion is pleasing to see as it confirms that the Tribunals are willing to find room for the judgments in Wakefield and Longridge to exist alongside the ruling in Yarburgh. This will be a welcome decision for many charities who are not on all fours with the judgments but operate a broadly similar model. Despite the fact money was received in exchange for the provision of the nursery, and the Tribunal agreed it wasn’t a donation, when the whole picture was considered it was apparent that the activity was charitable and not business. The area of business/non-business is particularly grey with a vast wealth of caselaw muddying the water significantly and HMRC have been observed by this consultancy to use cases such as Finland and Borsele to make opposing points. At best this shows that HMRC also finds the area challenging.

Paragraphs 122 and 123 of the judgment are interesting and useful in demonstrating the way in which Tribunals will consider the question of business/non-business. Whilst HMRC argued that OYY took a lot more in fees than Yarburgh or St Pauls, the Tribunal found that this was not strictly relevant as it was the basis on which the fees are charged that is important and OYY sought only to cover costs; “…the difference between the two cases seem to be differences of scale or degree rather than of principle.” This is, overall, a positive result for charitable nursery operators who benefit from their supplies being regarded as non-business. However, it should also be remembered that this is a decision of the First tier Tribunal so does not create a binding precedent. It will be interesting to see if HMRC appeals this decision.

5. The Glasgow School of Art: Input Tax Recovery on Property Development

This appeal concerned the Glasgow School of Art (GSA) which contested a decision by HMRC to deny 100% input VAT recovery in relation to a refurbishment project on some campus buildings. The FTT had previously found in favour of HMRC’s original decision.

The GSA refurbished three buildings; the Assembly Building, the Foulis Building and Newbery Building. The buildings were all adjacent and on one site, the refurbishment project took place at the same time in relation to all of the buildings. The Foulis and Newbery buildings were demolished and replaced with the Reid building which was “wrapped around” the Assembly building. The whole project was contracted as a single development.

The GSA initially treated the input VAT on invoices from the contractor undertaking the project as residual and recovered in line with its partial exemption percentage. However, it later sought to change its argument and claimed that two distinct buildings had been built and that GSA was making a wholly taxable supply by leasing the Assembly Building to the GSA Student’s Association whilst the input VAT relating to the development cost of the new Reid Building  was recoverable in line with the partial exemption percentage. GSA therefore sought to recover the input VAT which it had previously not done so under its partial exemption calculation. It submitted a significant VAT refund claim.

The FTT had previously dismissed this appeal on the grounds that there was, materially, only one supply by the contractor to the GSA and, therefore, that the input VAT had correctly been treated as residual. The Tribunal in this instance agreed with the FTT and dismissed the appeal, concluding that the original invoicing arrangement gave the best reflection of the economic reality of the situation.

The UT also agreed with the FTT that GSA was not carrying on an economic activity. The rent paid by the student’s union was set at a level which it could afford, and it would take 500 years for the charity to recoup its outlay. This is not an economic activity.

Constable Comment: In order to support the claim that there were two separate supplies received by GSA, the charity went back to the contractor and split the development and invoicing into two sections and two distinct buildings. This case shows that, whilst important, contracts and invoicing arrangements are not the ultimate deciding factor; regard will always be had to the commercial and economic reality of the situation.

6. Simplification of Partial Exemption & Capital Goods Scheme

On 18 July 2019, HMRC issued a call for evidence consultation document on the potential simplification of Partial Exemption (PE) and VAT Capital Goods Scheme (CGS). The closing date for comments is 26 September 2019 and Constable VAT intends to respond. We would recommend all clients, and contacts, consider whether they would like to respond directly to HMRC or if you would like to incorporate comments into Constable VAT’s response. Some of the points to consider include:

  • Partial Exemption De Minimis Limits
  • Partial Exemption Special Methods
  • CGS thresholds and interval lengths

The consultation document can be viewed here.

Constable VAT Consultancy LLP (CVC) 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, those working overseas, and regionally based local organisations. CVC 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,, or Alternatively, please visit our website at 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.