This VAT & Charities newsletter comments on the following:
1. Local Healthwatch Organisation – whether carrying on a business activity for VAT purposes
2. Input tax recovery – application of Sveda
3. Business Test – again!
First Tier Tribunal
1. Local Healthwatch Organisations – whether carrying on a business activity for VAT purposes
Healthwatch is the name given to the provision of an independent consumer champion for health and social care. It operates both nationally, through Healthwatch England, and locally through Local Healthwatch Organisations.
Under the Health and Social Care Act 2012 local authorities were required to enter into contractual arrangements with a body corporate for the provision of various services. Hampshire County Council (the council) entered into such arrangements with Healthwatch Hampshire C.I.C (HH). The services in respect of the contract between the council and HH are categorised as:
• Public and Patient Involvement
• Information, Signposting and Advice
• Advocacy Services
HH, a consortium, subcontracted these services to Help and Care (H&C), a member of the consortium. H&C is a registered charity and is registered for VAT. HMRC agreed that the services provided by H&C to HH under the sub-contract are subject to VAT.
HH registered for VAT based on its understanding that its supply to the council is a taxable supply. However, in discussions between HMRC and the Chartered Institute of Public Finance and Accountancy (CIPFA) in 2013 the view was expressed that local authority funding to Local Healthwatch Organisations for carrying out statutory activities was outside the scope of VAT. HMRC wrote to HH in 2014 adopting this view.
The effect of HMRC’s decision was that HH were being charged VAT by H&C which they could not reclaim.
The Tribunal considered the principles set out in Longridge with regards to whether an activity is an economic (business) activity for VAT purposes. One of the key principles established for an activity to be economic was that there must be a direct link between the services rendered and the consideration received. HMRC argued that in the case of HH there was no such direct link because the true beneficiaries of the service is the local community and therefore the relationship between the consideration and the benefit was broken.
Another argument raised by HMRC was that the services in question were “state activities” and as such could not be economic activity for VAT purposes. The Tribunal could find nothing in the cases presented by HMRC that indicated that simply because activities are activities of the state they cannot also constitute economic activity for VAT purposes.
HMRC also contended that HH is a public body and therefore should not be regarded as a taxable person for VAT purposes. The Tribunal noted that the definition of public body for these purposes is deliberately very narrow. HH is not owned or controlled by the council, nor are there any organisational links between the council and HH. The Tribunal did not consider HH to be a public body.
The Tribunal rejected all of HMRC’s arguments. HH’s appeal was allowed. Its supplies to the council were taxable at the standard rate. This allows HH to recover VAT incurred on H&C’s fees. The council, as a local authority, can recover the VAT charged by HH.
CVC comment: whether HMRC would consider an activity of a charity or not-for-profit organisation is a business activity for VAT purposes is becoming increasingly more of a grey area. Many cases have been heard before the Tribunals on this point. Local Healthwatch Organisations will want to consider their activities in light of this decision.
2. Input VAT recovery – application of Sveda
JDI International Leasing Limited (JDI) appealed against HMRC’s decision to refuse its cross border refund claim. JDI is established outside the EU. JDI is a member of the Baker Hughes group of companies. It purchased tools in the UK which it leased to Baker Hughes Nederland BV (BHN) for no monetary consideration. HMRC refused JDI’s VAT claim because they considered that JDI did not use the tools for the purposes of an economic (business) activity (free supplies often constitute a non-business activity).
JDI also sells spare parts for the tools to BHN for monetary consideration. BHN leased the tools to third parties and made a charge for this. JDI argued that its activities overall were economic. The lease for no consideration did not break the direct and immediate link between tools purchased and supplies of spare parts. The Tribunal considered the two tests formulated by the CJEU in Sveda that the taxable person must satisfy in order to recover input VAT:
a. The taxable person must be acting as such at the time of receipt of the supplies received (the taxable person must be carrying on an economic (business) activity).
b. The taxable person must use the goods or services for the purposes of the taxed transaction (the goods or services must be used for a taxable business purpose).
In Sveda the organisation allowed its customers to use its facilities (a Baltic mythology path) free of charge in the hope that those customers would buy refreshments or souvenirs from its café and shop. The CJEU found that Sveda incurred expenditure on building the path for the purposes of making taxable supplies (café and shop) therefore VAT incurred was recoverable.
In this case it is not clear that there is a direct and immediate link between the purchase of the tools and a taxable activity. That does not mean a link does not exist.
In Sveda the taxpayer was offering free inducement to its own customers. The Tribunal noted that in this appeal BHN (which received the benefit of free tool hire) is not to any material extent a purchaser of spare parts from JDI.
The Tribunal rejected JDI’s appeal. There was no objective link between JDI’s acquisition of tools in the UK and JDI’s economic (business) activity of selling spare parts. JDI was therefore not acting as a taxable person when it acquired the tools. JDI was found to not be entitled to the repayment of the VAT in question.
CVC comment: the Judge did not consider that in order to obtain repayment of VAT JDI needed to establish the acquisition of the tools was essential to enable the spare parts to be sold. The appeal failed because JDI’s subjective purpose when acquiring the tools (to sell spare parts) was not enough to support VAT recovery. As established in Sveda, the fact that the immediate use of the goods and services are non-business is not an obstacle to VAT recovery.
Any charities or not-for-profit organisations which have incurred VAT on projects in which the immediate purpose appears to be non-business may be able to apply the principles established in Sveda to recover VAT incurred; for example, expenditure on maintaining a free to access wildlife park with cafes and shops.
3. Business Test – again!
Photogen Promo Music Adverts Ltd and Photogen PMA Ltd are related companies under the common control of Mr Nicholas Gayle. Mr Gayle appealed against the decisions of HMRC to refuse input tax claims and to cancel the VAT registrations of both companies from their dates of VAT registration.
The Tribunal considered the business test established in the Lord Fischer case. The appellant did not demonstrate ‘a serious undertaking earnestly pursued’. The Tribunal commented that the activities listed on the VAT registration application were disparate, lacked coherence as a cohort, there was no focus in building up any of the listed activities into a viable business, there was no evidence of any customer base, no supply chain had been established and there was no focus or strategy to promote or target any one activity and turn it into a viable concern. There was no evidence of any taxable supply having been made. The Tribunal also found that none of the input VAT claims were credible.
The Tribunal expressed the view that, for penalty assessment purposes, Mr Gayle’s behaviour was ‘deliberate’. HMRC downgraded the behaviour category to ‘failure to take reasonable care’ as the appellant’s mental health amounted to special circumstances. The Tribunal dismissed the appeal and upheld the penalties in the sum of £1,274 and £505.
CVC comment: it is interesting to note that the Tribunal used the business test established in the Lord Fischer case. HMRC has previously said that this test has now been superseded and the recent Court of Appeal decision in Longridge on the Thames appeared to confirm this. Interestingly, the Tribunal did not rely on the most recent litigation in Longridge. The use of the ‘old’ test in this case suggests that the Tribunal consider that this test is still relevant. The use of this test will be of interest to charities and not for profit organisations.
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 Beckett or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@ukvatadvice.com, laura.beckett@ukvatadvice.com and sophie.cox@ukvatadvice.com. Alternatively, please visit our website at www.ukvatadvice.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 CVC 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. CVC 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.