Constable VAT & Charities Newsletter July 2014

HMRC Compliance Checks – Relevant Charitable Purpose Certificate

We have been made aware that HMRC Charities Team is making routine compliance checks regarding ‘relevant charitable purpose’ certificates issued for the purpose of obtaining the zero-rate of VAT on the construction of buildings and annexes, thus receiving construction services VAT free. HMRC has sent letters to many voluntary sporting bodies who have issued certificates. HMRC instruct the organisation to provide various documents and information. If you have received one of these standard letters, or have issued a certificate in the last four years, please contact us if you would like to discuss this matter.

Changes from 1 January 2015

On 1 January 2015 changes will be made to the EU VAT place of supply of services rules involving business to consumer (B2C) supplies of broadcasting, telecommunications and e-services (BTE). Currently the place of supply for these services is where the supplier belongs. From 1 January 2015 the place of supply of the service will be where the customer is located. This means that the supplier may be obliged to register for VAT in all Member States in which it makes BTE supplies (most Member States operate a nil VAT registration threshold for supplies made by suppliers not established in that Member State). However, to save suppliers of these services having to register for VAT in every Member State where they supply BTE supplies, the supplier may opt to use the VAT Mini One Stop Shop online service (VAT MOSS). This will be available on 1 January 2015, but registration to use it is available from October 2014.

These changes will effect organisations who deliver services over the Internet. The easiest way for BTE suppliers to pay overseas VAT after 1 January 2015 will be via MOSS but to do this via HMRC the organisation must be VAT registered in the UK. This means that charities whose value of taxable supplies do not exceed the VAT registration threshold may be disadvantaged – these organisations will have a choice of registering for VAT in the UK and using MOSS (and being subject to all the obligations that come with a UK VAT registration) or registering for VAT in all Member States in which they make BTE supplies.

Recent VAT Tribunal cases

Cost Sharing Exemption

West of Scotland Colleges Partnership (TC03746), was set up for the purpose of providing services to colleges of further and higher education with a view to sharing costs. The work of the appellant is accessing grant funding from the EU and other sources. Rather than each individual college providing this service internally (which would not represent a taxable supply) it is considered more practicable and economic that one external entity should provide this to members of the group. The appellant’s service is VAT exempt if certain criteria are met under the cost sharing exemption. The issue in this case was ‘did each member make an “exact reimbursement of its share of the joint expenses”?’ The appellant made a repayment claim for VAT of £102,216.77 for the period from January 2008 to December 2011. The appellant claims VAT was incorrectly charged by it as its services should fall within the VAT cost sharing exemption.

The Tribunal considered that the test the appellant was required to meet was high as ‘exact reimbursement’ denotes a measure of precision. Guidance issued by HMRC in Information Sheet 07/12 emphasises the need for a ‘clear audit trail’. In this case the Tribunal found that the appellant falls short of satisfying the test for ‘exact reimbursement’. There was only limited documentary evidence available and ‘exact reimbursement’ was not shown satisfactorily in the audited accounts. The Tribunal dismissed the appeal.

This case is interesting as it is one of the first regarding the Cost Sharing Exemption which was only introduced in UK VAT law from July 2012. The case highlights the strict conditions which must be met in order for exemption to apply. It is not enough that costs are shared equally between the members of the group, there must be a ‘clear audit trail’ showing the benefits received by the members and cost attributed to the services supplied.

Company recharges – whether expenses attributable to onward taxable supply

Norseman Gold plc (TC03698) (Norseman) is a UK registered holding company whose operating subsidiaries carry on gold mining activities in Australia. HMRC’s position was that Norseman did not carry on an economic activity and did not make any taxable supplies. As such any VAT incurred was not input tax and was not recoverable because this VAT was not attributable to taxable supplies.

The Tribunal was satisfied that Norseman played an active part in the direction of its subsidiaries, however, the Tribunal highlighted that the difficulty for Norseman was the absence of any agreement about payment for what good or services were provided (that is supplies in exchange for consideration). The Tribunal concluded that it was not enough to have a vague intention to levy an unspecified charge at some unidentified time in the future. The fact that Norseman could have imposed a charge did not, in the Tribunal’s view, lead to the conclusion that it should be treated as if it had done so. The Tribunal accepted that payment is not a requirement of a business activity as long as there is an obligation to pay. However, the failure to stipulate any price or consideration at all can only lead to the result that there was no obligation to pay for the supplies at the time they were made. Therefore, the Tribunal decided that although the supplies themselves would be taxable if made, what excluded them from the definition of taxable supplies was the absence of an agreement on the consideration to be paid for them. As such what Norseman provided to its subsidiaries did not amount to taxable supplies and input tax was not properly allowable.

Inter-company management service charges

HMRC refused to register African Consolidated Resources Plc (TC03705) (ACR) for VAT, ACR appealed this decision. The issue in the dispute was whether the loan finance and management services provided by ACR to its subsidiaries amounted to an economic activity, or the making of taxable supplies, such that ACR should be treated as a taxable person eligible to be registered for VAT in the UK and able to reclaim VAT incurred on costs relating to making taxable supplies.

ACR provided management services to its subsidiary for an annual fixed fee of £10,000 which was intended to increase if the profits of the subsidiary increased. There were no written contracts between ACR and its subsidiaries for the provision of the management services. To date, no payments had been made in relation to the management services, and no profits had been made by either the subsidiaries. The Tribunal concluded that the provision of management services for what was, essentially, a fixed fee based on what the subsidiary could afford could not be treated as a taxable supply.

Both of the above cases highlight that it is important that all charities are aware that although a cost is recharged it does not mean that a supply is made for VAT purposes. There must be a supply in return for consideration, with documentation to evidence that there is genuine substance to any agreements entered into.

Construction of building and relevant residential and charitable purpose

Capernwray Missionary Fellowship of Torchbearers (TC03750) (Capernwray) is a charity which provides residential conferences and courses. Capernwray sought a ruling from HMRC that the construction of its intended Conference Hall building was to be used for a relevant residential or charitable purpose and therefore, construction was zero-rated. Capernwray’s position was that the attendees were students and its activities were not in the course of business.

The Tribunal found that the period of occupation did not have a sufficient degree of permanence to be student accommodation. The type of information the participants learn is not the type of knowledge which makes a person a student, and the accommodation was also used by persons taking a holiday. Therefore, the attendees were not students and the Conference Hall was not used for a relevant residential purpose.

Capernwray also argued that it did not profit from its activities and depended on donations and volunteers, therefore its activities were not economic in nature. The Tribunal found that although some of Capernwray’s activities are not economic in nature (e.g. provision of religious worship and evangelism) it provides more than that. In the Tribunals view, the provision of religious worship and evangelism does not change an economic activity into one that is not economic in nature. The Tribunal concluded that Capernwray was engaged in economic activity and therefore the Conference Hall was not used for a relevant charitable purpose.

Prior to this case HMRC issued Revenue and Customs Brief 03/14 which clarified the term ‘student’. This brief made clear that attendees of religious retreats are not considered students.

Construction of an annexe or extension to an existing building

Gateshead Jewish Nursery is a charity providing childcare facilities from two sites. It provides a nursery facility for 3 – 5 year old pre-school children and a crèche facility for babies from birth to the age of 2. This appeal concerned the VAT treatment of construction work at the crèche facility.

In 2011 the charity decided to build additional accommodation at the site of the crèche facility to cater for children between the ages of 2 – 3 years old to bridge the gap for children too old for the crèche facility and too young to move to the nursery facility. The issue at appeal is whether or not the construction work is zero-rated. If the construction work amounted to an enlargement, extension or annex to the existing building then, prima facie, it would be standard rated. However, there is an exception to this in cases of annexes where the annex is capable of functioning independently from the existing building, and where the main access to the annex is not via the existing building and vice versa. The charity sought a ruling from HMRC. The Commissioner stated that the construction works were standard rated. This decision was confirmed by HMRC upon review.

The Tribunal found that while the new structure was capable of functioning independently from the existing building (although it obtained its electricity supply from the existing building) it was integrated into the existing building so as to form an extension rather than an annexe and therefore, the standard rate of VAT applied to the construction works. There was a door between the rooms of the existing building and the new structure, therefore the new structure was physically connected to the existing building and that physical connection was not remote (i.e. it was not merely a corridor or steps). 

Grant funding or consideration for a supply

The South African Tourist Board [2014] UKUT 0280 (TCC) (SATB) appealed to the Upper Tribunal against the First Tier Tribunal’s decision that its supplies were not business activities and as such VAT incurred by it was irrecoverable. The SATB carries out a number of activities in pursuit of its objective to promote South Africa as a tourist destination. It is largely funded by the South African Government governed by a Performance Agreement, the issue of the appeal was whether SATB is a statutory body, carrying out statutory duties, and receiving grant funding or consideration for a taxable supply.

The Upper Tribunal found that the Performance Agreement fell short of demonstrating the necessary degree and nature of reciprocity required to constitute payments made by the South African Government to SATB as consideration for supplies. Although there was a link between funding and performance, this was consistent with an arrangement of negotiated funding.

Constable VAT is often asked to evaluate whether agreements constitute grant funding (outside the scope of VAT) or consideration for a supply.

Upper Tribunal – forthcoming hearings

Wakefield College (FTC/28/2014)

In our previous newsletter we mentioned Wakefield College. The First Tier Tribunal decided that course fees which were part funded by grants and part paid by the student amounted to non-business income (it was accepted that fees fully paid for by the student was business income).

HMRC has appealed this decision, the hearing date is yet to be confirmed.

United Grand Lodge of England (FTC/70/2014)

The United Grand Lodge of England (UGLE) has appealed against the First Tier Tribunal’s decision that, prior to 2000, its supplies of membership subscriptions were taxable because its donations to Freemasons and their dependents were an aim in itself (and not ancillary to its aims of a philosophical, philanthropic or civic nature).

The hearing date is yet to be confirmed.

Revenue and Customs Briefs

Revenue and Customs Brief 20/14 – Compound Interest

HMRC has issued brief 20/14 explaining their position following the High Court judgment in Littlewoods Retail Ltd. The High Court ruled in favour of Littlewoods, deciding that their claim for compound interest succeeded in full. HMRC disagree with the High Court judgment and has received permission to appeal. HMRC intend to apply for any claims for compound interest already lodged with the High Court to be stayed pending the final decision in the Littlewoods case. Any new claims for compound interest will be refused.

This case may be of interest to charities who have received payments from HMRC for overpaid VAT or under-claimed input tax. Along with the repayment of VAT, HMRC may also pay the taxpayer interest. Currently HMRC pay ‘simple interest’ at the current Bank of England base rate, if HMRC fail in their appeal ‘compound interest’ will be payable.

Revenue and Customs brief 25/14

Following the CJEU’s decision in Bridport and West Dorset Golf Club (C-495/12) HMRC has issued brief 25/14 explaining its interpretation of the decision and approach to repayment claims. The CJEU decision in Bridport clarified that supplies by membership organisations to members and non-members should fall within the VAT exemption for sport, UK VAT law had excluded supplies to non-members from the VAT exemption. Brief 25/14 outlines HMRC’s plans for dealing with claims for VAT overpaid as a result the UK’s incorrect implementation of the exemption. The brief confirms that VAT refunds will be paid to clubs that refund the VAT to the non-members, but HMRC are considering whether clubs that are unable or unwilling to refund VAT to the non-members will be ‘unjustly enriched’ and therefore should be denied a refund.

This decision by the CJEU may provide some membership organisations who offer sport services (e.g. golf clubs, hockey clubs) a chance to revisit VAT treatments on supplies to non-members.


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, and  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.

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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.