Constable VAT & Charities Newsletter Autumn 2023


VAT registration helpline
From 22 May 2023, HMRC have closed the VAT registration helpline. This line was assisting charities and businesses with VAT registration applications; however, HMRC confirmed that over 85% of the calls received were from taxpayers seeking an update on the progress of their VAT registration application. Taxpayers can now make use of the ‘Where’s my reply’ tool rather than making phone calls, allowing HMRC to allocate resources more efficiently and processing more applications. Taxpayers should expect a reply to VAT registration applications within 40 working days.

Check if you need to report errors in your VAT return
This newly published guidance can be used to check if charities need to notify HMRC about VAT accounting errors that are over the error reporting threshold on VAT returns (£10k net) and find out how to report any errors that must be notified to HMRC using form VAT652. Charities can enter the relevant figures (net error and turnover) and should receive further guidance based on the figures provided.

VAT payment plan
Charities can now set up a payment plan for VAT through the Government Gateway account where they are unable to pay the VAT owing and:

  • Have filed its latest VAT return;
  • Owe £20,000 or less;
  • Are within 28 days of the payment deadline;
  • Do not have any other payment plans or debts with HMRC; and
  • Plan to pay the debt off within the next 6 months.

HMRC have confirmed charities and other taxpayers will not be able to set up a VAT payment plan online if they are using the cash accounting or annual accounting scheme or if they are within the payments on account regime.

How VAT affects charities (VAT Notice 701/1)
In the above guidance, section 6.1.3 ‘construction’ has been updated to include information about the relatively new 2-stage test (announced on 1 June 2022) that is used to assess whether a charity is conducting a business and, in that context, can benefit from the zero-rate relief that applies to some construction services. Section 6.1.4 has been added dealing with ‘Certificates issued to get certain construction works at zero rate’. HMRC Brief 10/22 can be viewed here.

Partial Exemption (VAT Notice 706)
The above guidance has been updated and the option to send an email to get an approval for a partial exemption special method (PESM) has been removed. Many VAT registered charities use a PESM where the partial exemption standard method, based on the relationship between taxable and exempt supplies or income, does not provide for a fair and reasonable recovery of VAT incurred on those costs (usually general overhead expenses) that cannot be directly and exclusively attributed to a specific supply or activity. A PESM can be based on almost anything, providing it produces an outcome that is fair to the charity and HMRC, and Constable VAT clients use a range of methods, including but not limited to, staff-time (where staff record what activities are worked on), floor area, transaction count, VAT incurred, expenditure, headcount, cost centres and sectorised methods.


High Court

1. Legitimate expectation

Issue: VAT liability of supplies of accommodation

VAT sum involved: £4.8million

This case is not charity related; however, it offers a very interesting insight into HMRC’s behaviour, in some cases. Realreed Limited (RL), is a company supplying serviced accommodation in over 200 flats. These supplies were treated as VAT exempt. In 2019, HMRC took the view that RL was making taxable supplies of accommodation and raised VAT assessments for unpaid VAT in the sum of £4.8 million. This decision regarding the VAT liability of the supply is under appeal to the First-tier Tax Tribunal (FTT) and the case is yet to be heard; however, RL also proceeded to the High Court to request judicial review and it is the outcome of that request which is considered in this appeal. Three grounds were advanced in arguing for judicial review. These were that HMRC’s decision to raise the disputed assessments:

  • Was unreasonable, conspicuously unfair and/or vitiated by the unlawful frustration of a legitimate expectation held by the claimant;
  • Was contrary to general principles of EU law; and/or
  • Disproportionately infringed the Claimant’s rights under Article 1 of the Protocol 1 to the European Convention on Human Rights.

It was the first of these grounds, ‘legitimate expectation’, that was considered in most detail. RL argued that HMRC had carried out VAT inspections on multiple previous occasions and was aware that RL was treating the supplies in question, of serviced accommodation, as VAT exempt and this was never challenged and appears to have been accepted as correct by previous HMRC VAT inspectors. In addition, HMRC had previously raised VAT assessments which were based on amending partial exemption calculations, leading RL to assume that HMRC was content with the VAT treatment of the supplies. These VAT assessments seem to have been based around the attribution of VAT incurred and mechanics of the calculation rather than the fact that HMRC disagreed with the VAT liability of supplies identified by the taxpayer. HMRC contended that RL had no legitimate expectation that the supplies could be treated as VAT exempt.

The High Court highlighted that the HMRC officers, during the VAT inspection, did not apparently specifically examine whether the VAT exemption applied and took the view that even if HMRC had ruled that the supplies were subject to VAT, RL would have challenged this ruling (as it is currently doing so to the FTT). As a result, the Court concluded that RL made its own decision regarding the liability of its supplies and did not do anything in reliance on the alleged legitimate expectation. Alternatively, RL did not prove that anything which it claims that it might have done in reliance on the alleged legitimate expectation resulted in detriment to RL. The application for judicial review was dismissed.

Constable Comment: This hearing did not consider the VAT liability of the supply in question or whether HMRC’s VAT assessments were correct, this will be determined in the first instance, at least, by the FTT. However, RL argued, because of HMRC’s previous VAT inspections, it had a legitimate expectation to believe its supplies are correctly treated as VAT exempt. However, the Court ruled that the HMRC visiting VAT officers did not specifically consider whether the supplies were VAT exempt or not and that RL made its own decision on this point. If a charity wishes to gain certainty over the VAT treatment of certain supplies, and the position is ambiguous, we usually suggest submitting a Non-Statutory Clearance (NSC) to HMRC VAT Charities Team in which all the relevant facts are set out. RL’s situation highlights the point that charities cannot necessarily assume that the fact that HMRC does not question or challenge a VAT liability issue during a VAT inspection means the VAT treatment is correct and is not protection against future VAT assessments. Constable VAT has relevant experience and would be pleased to assist with any NSC. In a broader context, we do have sympathy with RL and the position it finds itself in. One of the basic and fundamental requirements of an HMRC VAT officer conducting a VAT audit of VAT returns submitted, a VAT compliance inspection, is to verify the VAT liability of a charities or taxpayers supplies. This is key to determining whether VAT returns have been completed correctly. In some cases, the position may be arguable, and, in the sector, we often have discussions on matters such as grant funding versus supplies of services in return for payment. In cases where the position is not clear cut, HMRC officers do have additional technical support available, HMRC policy teams, for example. It is not clear why the HMRC visiting officer in 2019 took a different view from colleagues who had conducted compliance inspections before; however, we would reasonably expect any HMRC VAT visiting officer meeting a charity or other taxpayer to verify all its activities and to be content that the VAT liability of those activities, and income streams, had been correctly identified.     

Upper Tribunal

2. Recovery of residual input VAT

Issue: The recovery of VAT incurred on expenses that cannot be attributed to a particular activity

VAT sum involved: Not quantified

This case concerned Kingston Maurward College (KMC), a rural studies college in Dorset supplying grant and fee funded education, alongside commercial business activities such as sales of produce from its farm, wedding and conference venue hire, camping site etc. It is not a registered charity, but it does have charitable status for the purposes of the Charities Act 2011. A PESM was agreed between HMRC and KMC in 1998; however, KMC argued that it was entitled to reclaim more of the VAT it incurred than was provided for by the PESM. The FTT found that KMC’s supplies of fully funded education courses were VAT exempt. However, the FTT dismissed its appeal against HMRC’s rejection of its input VAT claim based on the grounds that all its supplies constitute a single integrated supply and all the input VAT incurred is therefore residual which should be recoverable (except a small amount of de-minimis input VAT attributable to exempt supplies).

In addition, as KMC did not provide any alternative arguments as to how much input VAT is recoverable, in the event the FTT rejected its original grounds, the FTT ruled that no input VAT was recoverable. On appeal to the Upper Tribunal (UT), KMC contended that it should have been permitted to argue that if not all, some of its input VAT was recoverable and:

  • The FTT was wrong to decide not to make any findings on the extent to which the claimed VAT constituted residual input tax. This was because the issue had not been properly raised and particularised by HMRC.
  • The FTT wrongly failed to treat the hearing as determining issues of principle rather than finally determining quantum.

The UT stated that KMC should have pleaded a case in the alternative, if the single business argument failed. It was open for KMC to indicate what kinds of input the claimed tax related to and what the inputs were used for. The UT concluded that if KMC had provided such evidence then HMRC would have had to consider it; however, in the absence of it, HMRC’s statement of case was not inadequate and accordingly there was no error on the FTT’s part in deciding the issue as it did.

Alternatively, KMC tried to argue that the FTT should have made a decision in principle and remitted the case back to the parties to agree what proportion of input VAT was recoverable. The UT rejected this argument stating that KMC’s case was on an all or nothing basis. The FTT had a discretion to allow KMC the opportunity to agree the extent of residual input VAT that is recoverable, but it chose not to which the UT considered to be clearly open to it. The appeal was therefore dismissed.

Constable Comment: In this case, KMC tried to argue that the FTT’s ruling was procedurally unfair; however, without putting any alternative points forward to the FTT, it failed to argue this successfully. This case highlights the importance that parties to an appeal must put all of its arguments before the FTT from the outset. The case may be of interest to charities supplying VAT exempt education. In addition, where a PESM has been previously agreed there must be good grounds for seeking to amend the PESM. This usually occurs where there has been a significant change in the activities of an organisation, a charity diversifying its activities. This can lead to situations where more VAT incurred on overhead costs is consumed on generating taxable supplies than was the case when the PESM was agreed with HMRC.   

First Tier Tribunal

3. Exemption: Fundraising events

Issue: VAT fundraising events and the VAT exemption available for charities

VAT sum involved: circa £300k

This case considered the VAT implications of the annual Great Yorkshire Show (the show) organised by the Yorkshire Agricultural Society (YAS), a registered charity. YAS initially treated its supplies as standard rated; however, in 2020 it submitted a VAT accounting error correction for overdeclared output tax regarding its admission income in relation to the 2016 show, on the basis that the show is VAT exempt under the fundraising exemption available for charities and certain other qualifying bodies where specific tests are met, corresponding input VAT adjustments were made to take account of the reclassified VAT exempt supplies. HMRC rejected the VAT refund claim and subsequently raised an additional VAT assessment when YAS confirmed that it had not accounted for output VAT in respect of admission income, sponsorship, or advertising in respect of the 2017 show. We would remind readers that the VAT exemption available in relation to fund-raising events extends to standard rated supplies made at the event. If the fund-raising event qualifies for exemption, then so do other supplies, such as sponsorship, that would ordinarily be standard rated. When a charity holds a qualifying event under this heading, only supplies that would be zero-rated (sales of donated goods, programmes, children’s clothing etc) override the exemption.

The supply of goods and services by a charity (or another qualifying body) in connection with an event that is organised for charitable purposes, whose primary purpose is the raising of money and that is promoted as being primarily for the raising of money, is exempt from VAT where these two conditions are satisfied.

Whilst it was common ground that the show was organised for charitable purposes by a charity, HMRC took the view the show was of a commercial nature to promote farming in the community and generate profits. The Tribunal concluded that fundraising was not the exclusive purpose of the show as there were two main purposes, being fundraising and education. However, neither can be ranked in order of importance and it was concluded that the ‘primary purpose’ (raising funds) condition was met.

With regards to the ‘promoted as being primarily for the raising of money’ test, the Tribunal relied on case law to conclude this condition is an incorrect transposition of the EU VAT Directive in its entirety and therefore should be ignored. Alternatively, at least the use of the word ‘primarily’ should be ignored. As the event was promoted on fliers and admission tickets as a fundraising event, the Tribunal concluded all conditions for exemption were met and admission to the show was VAT exempt. The appeal was allowed on this technical point, and, in addition, the Tribunal found that HMRC had not abided by statutory time limits when raising its VAT assessment in respect of the 2017 show, the VAT assessment not being issued within one year after the evidence of facts, sufficient in the opinion of HMRC to justify the making of an assessment, came to the Commissioners knowledge.

Constable Comment:  The Tribunal considered the fundraising exemption conditions and provided some useful commentary specifically on item 1(c), regarding the ‘promoted primarily for the raising of money’ condition. It was concluded that this went beyond the requirement of the EU VAT Directive, therefore should be deleted, or the word ‘primarily’ removed. This is a particularly interesting decision for charities and other qualifying bodies (wholly owned trading subsidiaries, trade unions, professional bodies, other public interest bodies, charitable sports clubs, and cultural bodies) and there may be scope for these organisations to revisit the VAT accounting treatment of events over the last 4 years, subject to the unjust enrichment rules and taking account of the partial exemption position. This decision is, at this stage, only binding on the parties concerned (it remains to be seen whether HMRC appeals the decision to the Upper Tribunal); however, opportunities may be available for charities and other organisations to revisit VAT returns submitted or firm up arrangements moving forward. Similarly, it is important to remember that when HMRC raises VAT assessments that these are valid and are not ‘out of time’.

4. Input tax incurred on taxable business activity?

Issue: Were the activities undertaken by way of ‘business’ for VAT purposes?

VAT sum involved: Not quantified

This case concerned 3D Crowd CIC (3D), a community interest company (CIC) incorporated in March 2020. It was set up by a small group of volunteers to donate personal protection equipment (PPE) to the NHS and care homes in response to the COVID 19 pandemic. However, the number of volunteers grew significantly into thousands of volunteers and over 200,000 articles of PPE were donated to the NHS. 3D incurred VAT on supplies made to it, including seeking CE certification, general overhead costs, and materials. 3D sought to recover this VAT incurred; however, HMRC denied the claim.

Whilst HMRC were sympathetic towards 3D and were aware of the importance of its actions, HMRC denied the claim on the grounds that 3D did not carry out a business activity because the PPE was ultimately given away by 3D. Therefore, the VAT costs paid cannot be said to have been incurred for any business activity.

3D argued that it had the genuine intention of making taxable supplies of PPE; however, it was first required to obtain BSI accreditation to sell PPE as opposed to donate. Although it was not able to fulfil this intention, as the accreditation was delayed and other suppliers fulfilled the need for PPE, input VAT should be recoverable as the CIC had the intention of making taxable supplies in return for consideration.

The Tribunal first concluded that it was clear 3D had the intention of making taxable supplies in return for consideration as otherwise there was no benefit to incurring the costs on getting BSI accreditation (BSI was not necessary to donate but was a requirement to sell PPE). As a result, any VAT expense on the immediate cost of CE/BSI accreditation was incurred solely for intended business purposes and is recoverable as input tax in full.

Referring to relevant case law, the Tribunal concluded the fact that 3D did not fulfil its plans of taxable supplies does not, in the absence of fraud or abuse, impact its ability to recover input tax as what is commonly known as an ‘intending trader’, meaning that it has a firm and genuine intention to make taxable supplies. However, at a certain point, 3D was aware that it would not be able to sell all the PPE and knew some must be donated, therefore the business purpose was not the only purpose of 3D. As a result, the Tribunal concluded that VAT incurred on general overhead costs and materials will need to be apportioned to reflect the non-business activity of donating PPE.

Constable Comment: This case considered whether there was an intention by 3D to undertake a business activity supplying PPE and, if so, whether the VAT incurred by 3D was for the purpose of making those taxable supplies in the future. It also considered whether it matters if those intended taxable supplies are never made. Whilst HMRC made it clear that they were sympathetic to 3D’s position and aware of the importance of 3D’s actions, HMRC are bound by VAT legislation and unable to act outside of this. A charity, or commercial business, is allowed to VAT register in advance of making taxable supplies (usually to reclaim VAT incurred) on an intending trader basis if it can satisfy HMRC that business activities are being undertaken and there is a firm and genuine intention to make taxable supplies in the course or furtherance of that business. The 3D case provides some useful detailed analysis on what constitutes a business activity applying various case law, Wakefield College, for example. Where there is ambiguity if VAT was incurred for business purposes, we would recommend seeking professional advice to reduce the risk of HMRC challenging the VAT treatment. Constable VAT has experience around intending trader VAT registrations and we would be pleased to assist with any related queries.

If you require any further assistance in relation to points covered in this newsletter, or any charity VAT accounting matters, please do not hesitate to contact ,  or and we will be pleased to assist.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.