Constable VAT & Charities Newsletter December 2014

UK MOSS VAT Registration

We have addressed previously the changes coming into force on 1 January 2015 in relation to the place of supply of services rules involving business to consumer (B2C) supplies of broadcasting, telecommunications and e-services (BTE). Registration for the VAT Mini One Stop Shop (MOSS) was available from October 2014.

To request a UK MOSS VAT registration under the new provisions a charity must already be registered for VAT in the UK.

Concern was raised by small businesses (and some charities) that the need to register for UK VAT would mean their UK services would no longer be able to be priced competitively. Many were considering ceasing to make BTE supplies in Europe.

Following a campaign HMRC appears to have conceded that whilst small companies and some charities may still be required to register for VAT in the UK to use MOSS, they will not be required to charge UK VAT on domestic sales. The Telegraph quoted a HMRC spokesperson, “Businesses below the current VAT registration threshold that can separate their sales to UK customers from sales to EU customers can voluntarily register the cross border element of their business, and then use that registration number to register for MOSS. This means that their domestic sales will remain VAT free.” Presumably ‘nil’ VAT returns will be required in respect of UK sales.

Charities are now able to register for the VAT Mini One Stop Shop (VAT MOSS) optional online service. VAT MOSS will save charities supplying digital services to consumers from having to register for VAT in every EU Member State where services are supplied. Charities must register themselves but can then authorise an agent to act on their behalf. The first MOSS VAT return will cover the period 1 January to 31 March 2015. This will be available for completion online from 1 April 2015 and needs to be filed and paid by 20 April 2015.

Constable VAT recommend that charities supplying BTE services (including services delivered over the Internet such as electronic newsletters and magazines) to individuals in other EU Member States consider how the change in the VAT rules will impact. It may be necessary to take VAT advice prior to 1 January 2015.

 Recent VAT Tribunal cases

 First Tier Tribunal (FTT)

Zero-rating motor vehicles converted for disabled persons

Tyne Valley Motorhomes (TC04081), appealed against an assessment raised by HMRC (£703,583) and penalty of £47,632 for careless inaccuracies. The assessment related to alleged incorrect zero-rating of sales of mobile homes to handicapped persons. The assessment was based on HMRC’s decision that the fitting of grab handles to motorhomes did not entitle the vehicles to be zero-rated. It was not disputed that the appellant’s customers were handicapped.

An HMRC argument was that the conditions for zero-rating include that the handicapped person must need the adaptation both to enter and drive the vehicle. The Tribunal dismissed this and pointed out that if that contention was correct it would make most of HMRC’s guidance on the subject completely misleading. HMRC’s key argument was that the fitting of grab handles did not ‘substantially’ and ‘permanently’ adapt the motorhome, a condition of the zero-rate. However, the Tribunal noted that the fitting of grab handles appeared to satisfy the definitions of ‘substantial’ and ‘permanent’ provided by HMRC in its published guidance.

The Tribunal, relying on previous case law, stated that ‘substance’ should be judged according to the effect achieved by the adaptation, rather than by its extent and the effect of the adaptations. In this case persons who would not otherwise have been able to enter vehicles were enabled to do so. The Tribunal found that, in the ordinary sense of the word ‘permanent’, the adaptations were permanent. The Tribunal held that the assessments raised by HMRC were invalid. The zero-rate had been correctly applied, as a result the penalty also fails.

The Tribunal also made it clear that the appellant cannot be said to have been ‘careless’ because they relied on HMRC’s published guidance. The Tribunal also added that they considered it, “utterly wrong for the Commissioners to increase the amount of the penalty by removing some of the mitigation they had previously allowed when and because the appellants submitted their notice of appeal to the Tribunal”. The Tribunal regarded this as a misuse of the penalty regime.

HMRC Public Notices are HMRC’s interpretation of VAT law. It is disappointing that the Commissioners presented to the taxpayer and Tribunal an argument which contradicts public guidance. However, reassuringly, in this case the Tribunal sided with the taxpayer and clearly stated that a penalty cannot be issued for ‘careless’ behaviour when the taxpayer relies on published guidance, as entitled to do by reference to HMRC’s ‘Your Charter’ document.

 Whether subsidised meals and books provided in the course or furtherance of business?

Liverpool Muslim Society, is a charity registered for VAT with effect from 1 August 2007. Its first VAT return covered the period to 30 September 2011 recording a VAT reclaim due of £129,362. The charity contends it makes taxable supplies of catering and of books and publications. Input tax reclaimed on the first VAT return related to construction services. HMRC denied the charity’s input tax claim on the basis that the charity has only non-business activities and makes no business supplies. HMRC de-registered the charity.

The Tribunal had to decide whether the charity made taxable supplies in the course or furtherance of business. HMRC contended that the meals provided were subsidised to such an extent that they were not run on a commercial basis. Liverpool City Council paid for the staff cooking and serving meals, including the chef. In addition, there was no sufficient link between donations made and books and publications supplied. Books were freely available irrespective of any payment or donation. In the absence of consideration there was no supply.

The Tribunal found that the charity did not supply meals in the course or furtherance of business. The charity did provide catering services for a consideration but the amount charged was intended to be heavily subsidised. Where individuals are unable to afford the cost of a meal they receive a free meal.

In relation to the supplies of books and publications, the Tribunal found that there was no sufficient link between the donations and the books and publications. The books and publications had no set price. Sums received by way of donation could not be attributed to specific books or publications; the Tribunal emphasised that it was not a question of making a profit, selling at cost price or selling at a subsidised price. In providing the books and publications the charity was fulfilling its charitable aims. Therefore, because consideration was not present the charity was not making zero-rated supplies of books and publications.

In light of the Tribunal’s conclusions the charity was not entitled to be registered for VAT. The charity’s appeal was dismissed and it was not entitled to a VAT refund.

Single or multiple supplies and reverse charge provisions

Church of Scientology Religious Education College Inc (CSR) is an Australian charity. The Churches of Scientology in England are part of CSR and registered for VAT in the UK. The Church of Scientology International (CSI), based in the US, supplies services to CSR.

HMRC and CSR agreed that the supply made by CSI to CSR was a single supply. CSI and CSR entered into an Ecclesiastical Services Agreement (ESA) in which twelve services were identified. CSR viewed this as a single supply of education services (exempt from VAT). In HMRC’s opinion this is a single supply of governance and ecclesiastical management services (taxable at the standard rate).

Since 1 January 2010 the place of supply of these services is the UK. If HMRC’s assessment of the position is correct, CSR will be liable to account for output VAT on the supplies received under the reverse charge provisions. If CSI’s supplies to CSR are VAT exempt the reverse charge will not apply.

CSR is VAT registered and makes taxable and VAT exempt supplies. It does not enjoy a full input VAT recovery. Therefore, if the supplies received were classified taxable governance and management services any VAT due under the reverse charge could not be said to wholly and directly relate to taxable supplies. This VAT would be likely to be an overhead cost and fall to be apportioned.

The Tribunal determined that CSI makes multiple supplies and concluded that, of the twelve elements to the service, nine would not qualify for exemption. Proceedings have been stayed for a period of six months to allow CSR and HMRC to reach an agreement to apportion supplies between standard rated and VAT exempt supplies.

This case is an important reminder that where charities receive supplies from overseas suppliers the reverse charge procedures should not be overlooked. Where an overseas supplier does not charge VAT there may be a requirement for the charity to account for VAT.

 Upper Tribunal (UT)

 Zero-rate construction – whether building used for a relevant charitable purpose

HMRC appealed a decision by the FTT that construction services supplied to Longridge on the Thames (Longridge) (2014 UKUT 0504) should be zero-rated because the construction services related to supplies for a building that was intended for use solely for relevant charitable purposes (RCP). Longridge is a registered charity. The VAT in dispute was incurred on the construction of a training centre. The FTT found that the cost of construction was met entirely by donations and grants rather than charges made to customers (although charges were made to persons attending courses these were heavily subsidised and reliant on volunteers). The zero-rate of VAT applies to construction services if the services relate to a building used solely for a charitable purpose, otherwise than in the course or furtherance business.

In making its decision the FTT considered the scale of payments made, their calculation and the way the finances of the charity were dealt with in terms of donations and use of volunteers. HMRC relied on the EU case, Finland C-246/08, which reiterated the principle that an activity may be a business even though it is not intended to generate a profit. However, the UT did not regard the Finland case as authority for the suggestion that the FTT had applied the wrong test. The UT highlighted the need to look at the totality of the observable terms and features of the activities carried out by Longridge at the site.

The UT did not consider that there were any errors of law in the FTT’s approach and judged that the FTT had applied the correct test. The UT upheld the FTT’s decision and dismissed HMRC’s appeal.

This decision may provide charities with a planning opportunity or to revisit VAT construction costs. HMRC will not refund VAT charged by a supplier in error – the charity’s remedy will be with the supplier of construction services (who may be able to recover from HMRC VAT incorrectly charged). It is interesting to note that in this case HMRC argued subsidised activities were a business activity (and the charity could not benefit from zero-rating this incurring irrecoverable VAT) and in Liverpool Muslim Society subsidised activities were not business supplies according to HMRC.

Education exemption – supplies of catering and entertainment by a college are VAT exempt

Brockenhurst College (2014 UKUT 0046) (“the College”) provides education to students, including the teaching of courses in catering and hospitality, and performing arts. To enable students enrolled in catering and hospitality courses to learn skills in a practical context, the College operates a restaurant. The catering functions of the restaurant are all undertaken by students, under the supervision of their tutors. The public attend the restaurant and pay for meals, the charge being around 80% of the cost of the meal. Similarly, the performing arts students of the College stage concerts and performances for paying members of the public.

The issue at appeal was whether the supplies of catering and entertainment services are exempt for VAT purposes or standard rated. The case had already been decided by the FTT in favour of the College. The UT upheld the FTT decision, holding that it was right to conclude that the restaurant and entertainment services are exempt as supplies of services and goods closely related to the provision of education.

The UT agreed that there is no requirement under EU law that the goods or services must be consumed by the student. Supplies may be closely related if they are a means whereby the students better enjoy the supply of education; the requirement for direct use denotes no more than a need for the goods or services to be for the direct benefit of the student.

HMRC has appealed the decision. Education providers (including charities) may wish to submit VAT refund claims to HMRC.  Brief 39/14 confirms HMRC will consider making repayments; however, any repayment will be the subject of protective assessments awaiting the decision of the Court of Appeal. (Please see below with regards to HMRC’s Brief 39/14).

Court of Justice of the European Union (CJEU)

 K Oy – whether a lower rate of VAT for printed books should extend to e-books

The CJEU recently heard the Finnish case K Oy (C-219/13) which addressed whether the reduced rate of VAT for printed books should extend to books available as electronic files on physical supports such as CDs, CD-ROMS, or USB. The appellant argued that paper books and e-books are in direct competition with each other, and therefore the same VAT treatment should apply. The CJEU found that EU law allowed for a different rate of VAT to apply to books made available other than in paper form provided the principle of fiscal neutrality was complied with. It is for the national court to determine whether an ‘average consumer’ regards the electronic version as essentially similar to the paper version.

The VAT rates applicable to e-books is inconsistent in the EU. This case failed to provide clarity regarding the VAT liability of e-books. To summarise the current position:

  • The tax authorities in France and Luxembourg have allowed the super-reduced rate of VAT (equivalent to the UK’s zero-rate) to apply to e-books since 2012. The European Commission has commenced infraction proceedings against these Member States.
  • A UK taxpayer has submitted an appeal to the First Tier Tribunal against HMRC’s decision to disallow zero-rating of e-books.

 The results of these proceedings may be of interest to charities and not for profit organisations that supply magazines electronically. Currently, electronic publications are subject to the standard rate of VAT when charged for. Suppliers of electronic magazines should also be aware of the legislative changes regarding the place of supply of electronic services coming into effect 1 January 2015, as outlined elsewhere in this newsletter.

 Upper Tribunal – forthcoming hearings

 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 ‘Upper Tribunal Forthcoming Hearings and Register’ (updated on 31 October 2014) advises this case was heard between 12 – 14 October but the decision has yet to be published.

Wakefield College (FTC/28/2014)

HMRC appealed the decision of the First Tier Tribunal 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).

The ‘Upper Tribunal Forthcoming Hearings and Register’ (updated 31 October 2014) confirms this case was heard between  27 and 28 July 2014 but the decision has yet to be published.

Constable VAT will report these cases following publication.

Revenue and Customs Briefs

Brief 35/14 Partial Exemption Special Method

Revenue and Customs Brief 35/14 sets out HMRC’s position following the decision of the Upper Tribunal in Lok’n Store Group (LnS). This case concerned whether the Partial Exemption Special Method (PESM) proposed by LnS (a floor space allocation) produced a fairer and more reasonable result for calculating deductible VAT on overheads than the standard method. The Upper Tribunal dismissed HMRC’s appeal. HMRC has advised it will not be appealing this decision but that its policy regarding floor space methods remains, HMRC does not usually consider floor space methods appropriate for the retail sector.

This may provide an opportunity for charities to revisit partial exemption methods. Some charities with a network of shops use floor space VAT recovery methods.

 Brief 39/14 HMRC’s position following Brockenhurst College judgment

HMRC has published brief 39/14 following the decision of the Court of Appeal to grant HMRC leave to appeal against the Upper Tribunal’s decision in Brockenhurst College; the hearing will take place from 16 to 17 February 2015. In the UT’s judgment, the UT confirmed the FTT’s decision that supplies made from the college’s restaurant in which it trains chefs and sales of tickets for concerts put on by students as part of their courses were exempt from VAT as being closely linked to education.

HMRC has announced that there is no change to its current policy that such supplies are outside the scope of the education VAT exemption. HMRC will consider claims and make appropriate repayments based on the UT’s decision where the circumstances are exactly the same as Brockenhurst College. Repayments will be subject to protective assessments to cover the possibility the Court of Appeal may reverse the UT’s decision.

The effect of this decision for VAT registered education providers is that there may be scope to de-register from VAT if taxable supplies fall below the de-registration threshold (currently £79,000).

Constable VAT can assist with making claims for overpaid VAT where the terms of the Brief allow. Claims are likely to be subject to a 4 year cap; therefore, in most cases we would advise submitting a claim to HMRC, where appropriate, prior to the Court of Appeal judgment in 2015.

Finally, the partners and staff of Constable VAT would like to take this opportunity to wish all subscribers to our charity newsletter a peaceful Christmas and healthy New Year.

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. 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.