CVC Blog: are charitable activities business activities?

Many believe activities carried out in accordance with a charity’s aims and objectives are non-business activities and outside the scope of VAT.  This may not be the case. As stated by Lady Justice Arden in the Court of Appeal decision in the case between Longridge on the Thames and HMRC, “A charity does not enjoy blanket relief from VAT for its activities.”

There are VAT reliefs available for charities when making and receiving certain supplies of goods and services (construction, education and welfare, to name a few); however, VAT reliefs are subject to strict conditions.

It is necessary for a charity to consider whether its activities are economic activities for VAT purposes. If a charity does not make or seek a profit its activity may be considered a business activity for VAT purposes.

Whether a charity’s activities amount to economic activities for VAT purposes was recently considered by the Court of Appeal in the case of Longridge on the Thames (Longridge). Longridge provided water-based and other outdoor activities, for recreational and educational purposes, and instruction in how to undertake such activities. The charity constructed a new training centre. The charity’s contention was that the supply received should be zero-rated because the building was to be used solely for a ‘relevant charitable purpose’ (RCP). HMRC disagreed. HMRC considered that the activities of the charity were business activities. In addition to the VAT liability of the construction services, the question of whether the charity’s activities are economic may impact on whether or not (a) a charity has to VAT register (it makes taxable supplies) and (b) whether a charity has to charge customers VAT.

Longridge charges for participation in its activities. These charges are set according to the extent operational costs exceed grants and donated income. The individuals’ ability to pay is also taken into account. The charity is heavily reliant on volunteers. The charity won its case before the First Tier Tribunal and Upper Tribunal; however, the Court of Appeal has ruled in favour of HMRC.

Using principles iterated in the European case Finland an activity is economic if it is carried out in return for consideration (payment) received by the person providing the activity. There must be a direct link between the service performed and consideration received.

The Court of Appeal examined the leading domestic cases (Morrisons Academy, Fisher, Yarburgh and St Pauls). Lady Justice Arden commented, “There is no doubt that the courts must give effect to CJEU law and must do so despite domestic authorities or practice to the contrary.” Assessing the activities of the charity objectively the Court of Appeal found that the use of volunteers and the fact Longridge’s predominant concern is to further its charitable objectives has no bearing on whether the activities are economic for VAT purposes. It was decided by the Court of Appeal that there is a direct link between the consideration paid by service users and the service provided. The charity is therefore in business for VAT purposes.

Even though the charity’s intention is not to make a profit, and it subsidises courses, it is carrying out economic activities and is in business for VAT purposes. This means that construction works will attract VAT. The fact Longridge will incur VAT may result in an absolute cost in full or in part depending on the VAT liability of its business supplies.

This decision by the Court of Appeal is important and I have no doubt that we will be referring to it in years to come. This judgment should serve as a reminder to charities and not-for-profit organisations that the VAT liability of all income streams should be reviewed. It should not be assumed that charitable activities or subsidised activities where nominal charges are made are outside the scope of VAT.

The decision is clearly bad news for charities constructing new buildings and who hoped to be able to take advantage of zero-rating by applying the RCP conditions. Earlier decisions referred to above have considered motives and drivers. The cases of Yarburgh Children’s Trust and St Paul’s Community Project Ltd concerned the construction of buildings by charity’s operating children’s nurseries/playgroups.

In both cases the High Court decided that neither charity was making business supplies for VAT purposes. Indicators included the aims and objectives of both organisations including social concerns, lack of commercial pricing and an intention to cover costs. There are parallels between these cases and Longridge. Following the decision in St Paul’s HMRC issued a Brief stating that the Commissioners ‘do not agree’ with the decision but ‘have decided not to appeal further’. In the case of Longridge, HMRC again lost at the first two hearings but did pursue the matter and has won its case.