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.
This issue of the Constable VAT & Charities Newsletter covers;
- YMCA Birmingham: Tribunal decision & HMRC’s behaviour
- The Wellcome Trust: Taxable Person or “acting as such”
- The Learning Centre Romford & LIFE Services: Welfare Services Exemption
- Loughborough Students Union: Supplies “closely concerned” with education
- HMRC Notice 317: Imports by charities free of duty and VAT
- HMRC VAT Notice 701/1
Also of interest to some of our readers will be one of our blogs which covers the recent case of Sandpiper Car Hire Limited and discusses some of the issues, highlighted by the Tribunal, with the way in which HMRC interact with disabled people. This can be viewed here.
1. VAT and the Supporting People Programme
The case of Birmingham YMCA and others (Leicester, Black Country and Burton upon Trent) deals with the VAT liability of supplies of services made under a contract entered into with local authorities (LAs). The case also gives a clear indication of how HMRC behaves in certain situations.
The Supporting People Programme (SPP) was introduced in 2003. The appellants in this case were supplying “housing related support services”. These services were aimed at helping vulnerable people live independently in the community. In the cases of Birmingham, Leicester and Black Country there was correspondence between the charities and HMRC. It was agreed that the funding received from LAs was consideration, payment of which was due under contractual obligations.
Burton, not unreasonably, followed what it believed to be the generally agreed practice and charged and accounted for VAT on its supplies.
In 2015 HMRC changed its mind and decided these supplies were VAT exempt. This was communicated in writing to Birmingham and Black Country by letter dated 19 June 2015. Leicester were advised of this volte-face in September 2016 and Burton in March 2017.
The practical implications of the position initially agreed with 3 of the 4 charities appealing the revised HMRC decision meant that they had accounted for output VAT on supplies to the LAs. The LAs recovered VAT incurred so the position would be VAT neutral. The charities would be able to recover VAT incurred on costs directly attributable to making these taxable supplies. In addition, the value of taxable supplies generated would be beneficial to all of the charities in terms of the recovery of VAT incurred on non-attributable costs, general overhead expenses.
Following HMRC’s revised opinion, the impact on input VAT recovery by the charities is likely to be significant. VAT incurred directly relating to exempt supplies will only be recoverable if the partial exemption de minimis limits are satisfied. These limits also take account of non-attributable VAT incurred and the threshold is not particularly generous, less than £7,500 in value per year (£1,875 per quarter, £625 per month) and less than 50% of total input tax incurred.
Constable VAT Comment: The decision in this failed appeal is interesting from a technical perspective but also in terms of HMRC’s approach. There are a number of cases where HMRC wish to refuse charities input VAT recovery where LAs have outsourced services. If the LA itself supplied the services, it would be able to reclaim VAT incurred on the delivery of these services. By denying charities the right to reclaim input VAT, HMRC is collecting more tax: irrecoverable VAT incurred by charities.
In these cases, because HMRC had initially agreed the VAT liability of supplies with 3 of the 4 appellants, its approach was as follows:
Regarding Birmingham, HMRC would apply the Tribunal outcome to the date of the relevant disputed HMRC decision letter on 19 June 2015. This means that, from that date, supplies made under the contract would be VAT exempt. The same date applied to Black Country. It is not clear from the Tribunal decision what practice either charity had adopted; however, if a policy of standard-rating supplies had been maintained, it is likely that retrospective VAT adjustments would be required. The charities would have to refund VAT charged in error to the LA. If VAT exempt supplies had been made, input Vat adjustment would be required.
The position regarding Leicester would be as above; however, the relevant date in this case was 27 September 2016, when the charity was notified by HMRC that its supplies were VAT exempt.
As far as Burton were concerned, HMRC took the view that it had never agreed its supplies were standard rated. This being so, HMRC’s decision letter was dated 27 March 2017 and, as such, VAT accounting adjustments will be made retrospectively to VAT accounting period 03/13. This was because HMRC had never agreed that Burton’s supplies were VAT exempt. HMRC would issue VAT assessments retrospectively in line with four-year capping legislation.
These joined cases demonstrate that HMRC can, and does, change its policy. The cases also clearly show the value of liaising with HMRC’s VAT Charities Team in cases of ambiguity. The position of 3 of the charities in this appeal were protected from retrospective treatment, from the date HMRC formally notified the change in its policy, because the VAT liability of supplies had been agreed. It is obviously disappointing that HMRC should resile on agreements made and upon which charities had relied. Unfortunately, in recent times, Constable VAT has dealt with situations where HMRC has sought to renege on agreements previously reached and apply VAT assessments retrospectively. If this is something which your charity has experienced and you would like to discuss, please do not hesitate to contact Constable VAT.
The important points to take from this decision are that each case must be judged on its own facts. It is dangerous for one charity to determine the VAT liability of its own supplies based on a decision notified to another party. It is not safe to assume that one charity can rely on an HMRC ruling given to a different charity operating in similar circumstances. It is also clear that HMRC refreshes and revises decisions previously given and it is important that charities protect their positions as far as possible.
2. The Wellcome Trust: Taxable person or “acting as such”
This was an appeal against HMRC’s decision to refuse claims for repayment of overpaid VAT to Wellcome Trust Limited (WTL) amounting to £13,113,822. WTL is the sole trustee of a charitable trust which awards grants for medical research in the UK. The majority of these grants are given from investment funds. The case focussed around the correct interpretation of what constitutes a taxable person for EU law and what would be considered to be acting as a taxable person. A taxable person, for VAT purposes, is a person who is or is required to be registered for VAT owing to their pursuit of an economic activity.
The question at hand related to a place of supply issue, HMRC contending that WTL was acting as a taxable person and, as such, was liable to account for output VAT in the UK under the reverse charge provisions on investment management services it had received from non-EU suppliers. WTL arguing that the place of supply was not the UK as it was not a taxable person and, therefore, that no output VAT should have been accounted for in the UK by Wellcome Trust.
There was no dispute of facts in this hearing and the discussion focussed heavily around the meaning of “acting as such” within the EU law which states that “The place of supply of services to a taxable person acting as such shall be the place where that person has established his business”. HMRC’s contention was that WTL were acting in a taxable capacity whilst WTL argued that the investment management services were provided in relation to its non-economic activity of grant distribution meaning that the place of supply, pursuant to the EU law, would be where the supplier belonged.
There has been much case law around the issue of what constitutes a business activity and where a charity is acting in a taxable capacity pursuing an economic activity. In considering whether the Trust was acting in a business capacity, HMRC submitted that any supply to any taxable person must be regarded as taxable. The Court considered that HMRC could not be correct in this assertion as such an interpretation would mean, without any further language excluding such a person, that a taxable person receiving supplies for private purposes would still fall within Article 44 and would be required to account for VAT under the reverse charge. Therefore, it was observed, that to make Wellcome Trust fit into the definition of a taxable person in relation to these investment activities, HMRC would have to argue that the words “acting as such” exclude taxable persons receiving supplies for private purposes from Article 44 but do not take out taxable persons receiving supplies for non-economic business purposes. This was simply not a logical position to adopt.
The FTT gave much consideration to EU legislation as well as case law and concluded that WTL was not liable to account for VAT on the supplies received under the reverse charge procedure as it was not receiving the services in connection with any taxable activity, the place of supply rule determined by where the supplier belongs rather than WTL.
Constable VAT Comment: This judgment will be welcomed by charities who have both business and non-business activities and can directly attribute some input VAT costs to exempt supplies. Whilst the facts of the case are quite specific to Wellcome Trust, the decision serves as a useful reminder to those accounting for VAT under the reverse charge mechanism to clarify the VAT accounting position of their charity. The issue here, of course, was that VAT accounted for by WTL under the reverse charge procedure was irrecoverable.
3. VAT Exemption for Welfare Services (for private companies)
The question before the Upper Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality. Whilst the service providers were private companies they were seeking to rely on the charitable exemption for state regulated bodies.
The Learning Centre Romford (LCR) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which LCR receives funding. LCR had treated these supplies as VAT exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.
LCR argued that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.
LIFE Services provided the same type of care as LCR but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.
HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and LCR were held to be taxable. This overturned the First Tier Tribunal’s previous decision.
Constable VAT Comment: This decision will be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, generating taxable supplies this could be advantageous in producing a right to input VAT recovery.
4. VAT Exemption for Supplies Closely Linked with VAT exempt Supplies of Education
This appeal concerned whether sales of goods by a student’s union can benefit from the VAT exemption for supplies closely associated with education. The FTT had previously ruled in HMRC’s favour, holding that the supplies did not benefit from the exemption.
Loughborough Students Union (LSU) contended that it was an eligible body for the purposes of the exemption from VAT afforded to supplies of education of certain types and that its supplies were sufficiently closely connected with the overall supply of education offered by the University to receive the benefit of this exemption.
The Upper Tribunal considered that LSU could constitute an eligible body for the purposes of the exemption as it is a registered charity and any surplus cash generated is assigned to the continuance of its own, charitable activities.
However, despite being an eligible body, the Court considered that in order for the exemption to take effect the supplies being provided must be closely related to a supply of VAT exempt education. As LSU does not make supplies of education and does not make its supplies to an education provider but rather to individual students, it will not be able to benefit from the exemption.
The UT concluded that the supplies made by LSU were not closely linked to education in any event as the supplies of education provided by the University would be just as good without the supplies of household goods made by LSU. Other supplies which could be associated with education, such as stationery, were not shown adequately by LSU to benefit from the exemption.
Constable VAT Comment: This case demonstrates that a mere association with an eligible body, such as a University, does not mean that educational VAT exemptions extend to all supplies made by affiliates of that body. Where seeking to rely on a VAT exemption it is essential to ensure that it can be correctly applied. Failure to take due care in this regard could lead to large VAT bills for charities who sought to benefit from VAT exemption.
Interestingly, there was some consideration given to supplies of art materials by LSU which could be associated with education and benefit from the exemption. However LSU failed to show this to any substantial degree. The discussion around stationery and art supplies clarifies that, where it can be evidenced, exemptions can extend beyond supplies to universities where the supply relates closely itself to the education being supplied.
5. Update to Notice 317
HMRC has updated Notice 317: Imports by charities free of duty and VAT on 4 June 2019. Paragraph 1.3 has been updated with information about time limits if you disagree with a Customs decision.
6. Update to Notice 701/1
HMRC has updated VAT Notice 701/1 (How VAT effects Charities) on 1 May 2019. Section 5.9.6 has been added. This comments on the position where there is a mix of sponsorship income and donations received.
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 stewart.henry@constablevat.com, laura.krickova@constablevat.com and sophie.cox@constablevat.com. Alternatively, please visit our website at www.constablevat.com 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.