Constable VAT Focus 18 November 2019


VAT Accounting Manual

The VAT Accounting Manual has been updated to reflect certain changes in HMRC’s ability to use discretion when directing what VAT return stagger a business should account to.

VAT Grouping Manual

The terminology used in the manual has been changed in various sections.

EU VAT Refunds

The planned downtime from 9pm on Tuesday 12 November 2019 to 6am Wednesday 13 November 2019 and from 9pm on Thursday 14 November 2019 to 6am Friday 15 November 2019 was cancelled.


First Tier Tribunal


1. Relevant Charitable Purpose Building

This appeal by Madinatul Uloom Al Islamiya (The College), is against a decision by HMRC that construction services received by The College did not qualify for VAT zero-rating.

This is an issue which has been in the Courts a lot in recent years, cases such as Longridge and Wakefield considering whether a charity is operating a business or “economic activity”. In this instance, The College operated a boy’s residential Islamic faith school where attendees are taught the national curriculum and Islamic Studies. The College is fee-paying and sets this fee by reference to other similar residential faith schools.

The College built a new multi-functional hall. It issued a certificate to the contractor confirming that the hall would be used for a relevant charitable purpose (RCP) insofar as it would be used for solely non-business purposes. Whilst the Tribunal considered several issues such as whether the hall was a building and, if so, whether it was an annexe, the point on which the case turned was the RCP point. There were comparisons with the Yeshivas Lubavitch judgment to be made in considering whether The College was operating an economic activity. In that case, it was held that the zero-rate could apply to a similar situation (our coverage here).

The College argued that its fees were donations. If a pupil’s parents/guardians could not afford to make a payment, generally the debt was not pursued where there were good reasons. HMRC disagreed with this analysis. The Commissioners argued that the money received by The College represented consideration for a supply of education and that it was not a donation. Merely failing to pursue a bad debt does not make it a donation. The Tribunal observed that, whilst The College did receive substantial donations from the religious community, these donations were distinct from the fees charged and that this was reflected in The College’s financial statements. Considering that the fees charged are significant “in amount and in aggregate” and that the fees received make a significant contribution to the cost of providing the education, the Tribunal ruled that this hall was not constructed for a RCP and, therefore, that VAT was due on the construction costs.

Constable Comment: This case is yet another in a long string of business/non-business decisions relating to the construction of buildings. What has become clear throughout the last few years with all these judgments is that HMRC are particularly restrictive in accepting the applicability of the zero-rate for a building to be used for non-business purposes. Whilst the ruling in Wakefield re-opened the door to a contextual approach to deciding if an activity is “economic” in nature, it still appears a particularly grey area of the law.


2. Application of the Welfare Exemption

This appeal concerned an application made by RSR Sports Limited (RSR) for repayment of output VAT which it believed it had paid incorrectly. The application for repayment was based on the belief of RSR that its supplies were VAT exempt and that it had treated its supplies as taxable (standard rated) in error. HMRC argued that the supplies did not benefit from the VAT exemption for supplies of welfare services and, therefore, that VAT was correctly due on all of the supplies in question made by RSR. The VAT incurred was £229,000 which was declared over a four year period.

RSR trades as Get Active Sports and provides various services such as; after-school clubs, school holiday camps, childcare before and after school hours. It also provides staff to schools to cover teachers and to assess pupils. The supplies in question were the holiday camps provided for schools. RSR believed that these were services closely concerned with the care or protection of children and were “welfare services” for the purposes of the VAT exemption.

After some discussion of relevant caselaw, it was decided that the supply being made by RSR was a single supply. The question before the Tribunal was whether it was a single supply of activities for children, with an ancillary element of childcare, or vice versa. It is worth noting that there was no debate around whether RSR was eligible to make exempt supplies or around the interpretation of the exemption: the sole issue is the nature of the single supply being made.

The considerations made by the Tribunal were quite lengthy for a decision of this nature and merit a read if the situation applies to your business or charity. The findings and the reasoning for each finding are set out individually in a helpful way. A key area of the decision was the fact that staff did not hold coaching qualifications and that activities which were made available for the children were not performed to any external standard. The Tribunal supposed that this was indicative of the fact that the main aim of the camps was to provide childcare for the children and not to provide the activities themselves.

Constable Comment: This case turned on very specific facts and, on face value, appears to contradict some previous caselaw and HMRC’s general position. Whilst exemptions must be applied narrowly, this shows that there is scope for a sensible dialogue around these issues rather than a restrictive approach which has been taken in the past. In reality, the parents were paying for RSR to look after their children whilst they were at work, not for their children to participate in specific activities. This is a decision of the First Tier Tribunal only and it remains to be seen whether HMRC will appeal the decision to the Upper Tribunal.

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.