Recent VAT Tribunal cases
Grant or contract to supply services?
Woking Museum Arts and Crafts Centre (TC03315) (WMACC), a registered charity, appealed against a decision by HMRC that its service agreement with Woking Borough Council (WBC) to operate a museum and visitor information service was grant funded and therefore outside the scope of VAT. WMACC accounted for VAT on the payments received from WBC for supplies made under the service agreement.
The Tribunal examined the relevant document and concluded that it was a contract for a supply of services, WMACC were correct to charge VAT on its supply. The Tribunal took account of the fact WMACC had a liability to the local authority for breaking the contract, and the mutuality of obligation arising from the agreement.
This case is important as it highlights (once again) the difficulties in determining whether certain funding agreements are grants (outside the scope of VAT) or contracts for supplies of services and taxable. If the Tribunal had determined the service agreement was a grant the charity would not have been able to recover VAT incurred on direct costs. It is important to correctly determine the VAT liability of any proposed contracts, or monitor any contracts that may already be in place.
There have been several cases regarding membership subscriptions and VAT exemption in the First Tier Tribunal recently.
United Grand Lodge of England (TC03302) (UGLE) appealed against a decision by HMRC that for the period 1973 to 1996 supplies made to members were taxable. UGLE argued that it was an entity which had aims of a philosophical, philanthropic or civic nature and as such its subscriptions were exempt from VAT.
Freemasonry was described as a system of belief and principle that offers a framework for better regulation of members’ lives. The Tribunal was told that Freemasonry became more inward looking during WWII due to concerns of persecution and was then perceived as a secret society. Since the turn of the 21st century it has made endeavours to be more open and involved with local communities.
Whilst Freemason’s make substantial donations to charitable causes, most significant monetary donations were found to be for fellow Freemasons or their dependents and not seen as wholly philanthropic. The question was whether these aims were ancillary or aims in their own right.
The Tribunal ruled that for the period prior to the year 2000 these were not ancillary. Whilst some of the aims of UGLE fell within the exemption, those that did not were significant enough to make the subscriptions for the relevant period taxable.
The British Printing Industries Federation (TC03288) (BPIF) argued that their principal aims were as a Trade Union for the British print, packing and graphic communications sector. It also provided training and consultancy services. BPIF accounted for VAT on its subscriptions but then decided that this income was exempt under Group 9, Schedule 9, VAT Act 1994 and submitted a “Fleming claim” to recover overpaid VAT. HMRC rejected the claim on the basis that the subscriptions were taxable. BPIF argued that its main aims were defending the interests of its members by making representations to the Government and third parties. HMRC submitted that the majority (51%) of BPIF’s income was from services rather than subscriptions and that the subscriptions had varying levels and costs, and all but the most basic had additional taxable supplies provided as part of the cost.
BPIF’s constitution was examined. It was decided that the main objectives of BPIF were to improve member profitability and add value to their businesses. This could lead to a distortion of competition which would place the members at an advantage compared to other suppliers. The appeal was dismissed.
European Tour Operators Association (TC03353) was heard by the First Tier Tribunal (FTT) in December 2010. The taxpayer was successful in its appeal. HMRC appealed the matter to the Upper Tier Tribunal who referred the matter back to the FTT to “reconsider and amplify” its findings. The basis of the case was that the taxpayer believed its subscription income was VAT exempt as the Association’s primary purpose was to make representations to Government. HMRC contended the subscriptions related to a mixed supply of services and therefore fell outside of the exemption. The FTT concluded that the evidence clearly indicated that the primary purpose of the Association was lobbying and as such the subscriptions were VAT exempt.
Following these decisions now may be an appropriate time to review the liability of membership subscriptions and supplies of goods and services supplied to members.
Education exemption – closely related supplies
Brockenhurst College ( UKUT 0046 (TCC)), a Further Education college, supplies education courses in catering and hospitality. To enable students to gain practical experience the College also operates a restaurant run by students, supervised by their tutors. Members of the public attend the restaurant and are charged 80% of the cost of their meal. The College accounted for VAT on catering supplies. The College then submitted a VAT repayment claim to HMRC on the basis it should have been treating supplies as exempt from VAT as supplies closely related to the provision of education. The FTT agreed with the College that restaurant catering income qualified for VAT exemption. HMRC appealed this decision to the Upper Tier Tribunal (UTT). The UTT has now dismissed HMRC’s appeal and ruled the FTT’s decision correct.
This case may be of interest to organisations making supplies of education. Consideration should be given to whether supplies closely related to supplies of education may also be exempt from VAT.
Solely charitable purpose – construction services
In the case of Wakefield College (TC03108) the Tribunal considered whether part payment of fees by certain students was business income. This was relevant in considering whether the service of constructing a new campus could be zero-rated, the intended level of business use of the facilities being a determining factor.
The funding arrangements in place were complex. Based on a range of factors, such as age, the nature of the course, the financial circumstances of the student and place of residence, funding was received in the form of:
- fees paid by the student, or
- a combination of grants and fees.
It was not disputed that where a student paid full fees that this was a business supply. However, where a course was funded in part by grants, and in part by fees, the Tribunal concluded that the fees in question were non-business income. The different factors involved in determining the payment due meant that the part payment was not directly related to the delivery of the service. As such the part payments were not consideration for a supply.
This decision by the Tribunal that part payments do not constitute consideration may give some organisations scope to revisit VAT treatments on supplies where only part payment is required in circumstance similar to Wakefield College.
Charity expenditure – residual input tax
The Roald Dahl Museum and Story Centre (TC03445), a registered charity, appealed against HMRC’s decision that VAT incurred on refurbishing and maintaining exhibits directly related to the Museum’s exempt admission income and was therefore irrecoverable. The Museum argued that this VAT should be treated as residual input tax for partial exemption purposes. It relates to both the Museum’s exempt admissions and taxable supplies made in the Museum shop. It was agreed between both parties that the expenditure would be residual if there was a direct and immediate link between the expenditure and at least one taxable supply.
The charity argued that the exhibitions were important in generating taxable sales of books; this was evident in the fact that the sales of books relating directly to exhibits in the Museum were higher when compared to sales of those books in the rest of the UK. The charity also highlighted that many of the products sold in the shop interpret and reproduce the exhibitions. The charity also stated it would be possible to operate the Museum without charging an admission fee, if that were the case then there would be no question that the VAT incurred on exhibition costs directly related to the taxable sales made by the shop.
In response, HMRC said that it was insufficient that the exhibits provide subject matter of items sold in the shop. HMRC pointed out the cost components of items sold in the shop were the paper and ink – not the costs of arranging the exhibit itself. HMRC also argued that the fact that the existence of the Museum’s customers made sales of items in the shop a viable commercial prospect was not alone sufficient to meet the direct and immediate link test, the books in the shop could be sold anywhere.
The Tribunal looked at many of the products sold in the shop. The Tribunal did find that many of the items in the shop could be sold anywhere (and were) regardless of whether or not the Museum’s exhibits existed. Therefore, the exhibition costs were not a cost component of many of the products sold in the shop. The Tribunal did not accept the appellant’s argument that were they not to charge an admission fee the VAT incurred would be wholly attributed to the taxable supplies made in the shop.
Finally, the Tribunal looked at the ‘Hut Book’ which was written as part of the refurbishment and which contains depictions and explanations of over 150 items in the refurbished exhibit (the costs of designing and producing the Hut Book was part of the £100,000 refurbishment cost). The decision to create the Hut Book was a curatorial and a commercial one and was a key part of the refurbishment. The Tribunal accepted that the cost of writing, designing and producing the initial print run of the Hut Book was an integral part of the refurbishment costs, therefore there is a direct and immediate link between VAT incurred on expenditure on the refurbishment and the taxable sales of the Hut Book.
This case highlights the difficulties that can occur attributing VAT bearing expenditure to sales. HMRC do challenge taxpayers methods and reasoning for attribution.
Upper Tribunal – forthcoming hearings
The Chancellor, Masters & Scholars of The University of Cambridge (FTC/144/2013)
VAT incurred on investment income used to support both taxable and exempt activities was determined by the First Tier Tribunal to be residual input tax and as such recoverable to the extent that income derived supports taxable business supplies.
HMRC have appealed this decision, the hearing date is yet to be confirmed.
Whilst each case must be considered on its own specific facts, we were surprised to see HMRC take this case. It has been our long-standing experience that, following the principles established by the High Court in Church of England Children’s Society in 2005 (Business Brief 19/05 issued on 7 October 2005), HMRC’s policy has been that where a charity has been charged VAT on investment management fees it is entitled to recover VAT incurred as input tax to the extent that it can demonstrate the income generated has been used to support its taxable business activities.
Longridge on the Thames (FTC/52/2013)
HMRC issued a ruling that the construction by a charity of a training centre was standard rated because the charity’s activities amounted to business activities. The charity argued that, although a charge was made to persons attending courses, it was heavily subsidised and the charity relied on volunteers. The First Tier Tribunal agreed with the charity that the construction of the training centre was used for relevant charitable activities and as such the construction qualified for zero-rating.
HMRC have appealed this decision, the hearing date is scheduled for 13 – 14 October 2014.
Final thought – barter transactions
In a recent Bulgarian case, Serebryannay Vek (C-283/12), a couple bought an apartment in their private capacity, and then entered into a contract with the taxpayer (a company, of which one half of the couple was director). The taxpayer did not pay rent but agreed to carry out refurbishment works at its own expense in return. The question submitted to the CJEU was whether the taxpayer was supplying services (the refurbishment) to the couple in return for consideration (the use of the apartment) and as such should the taxpayer account for VAT on the consideration (determined by the Bulgarian tax authorities to be the cost of refurbishment). The CJEU determined that there was a direct and immediate link between the provision of services and consideration.
There is little HMRC guidance or commentary on the correct VAT treatment for barter transactions. Care should be taken when services are received at no cost by a charity as VAT may still be due. A number of charities enter into agreements whereby, for example, a publisher agrees to produce and distribute a magazine to members or supporters. No charge is made to the charity; however, in return it agrees to forgo advertising revenues which are retained by the magazine publisher. It is common for HMRC to view the value of the magazine advertising revenue as the value of the charity’s supply to the publisher.
Revenue and Customs briefs
03/14 Clarification of the term ‘student’
Brief 03/14 clarifies the definition of the term ‘student’, which is important when considering the VAT liability of construction works to buildings which are ‘used for a relevant residential purpose’.
In particular HMRC brief states that:
People who attend classes, often badged as ‘summer schools’, which may offer a life-enhancing experience and promote greater cultural or spiritual awareness but the subject matter of which falls into the category of hobbies or leisure interests (for example pottery workshops, art or literature appreciation courses etc.) as opposed to receiving educational or vocational training to an academic standard, will not qualify as ‘students’.
Whilst persons engaging in theological studies in order to become a minister of faith (such as a priest, rabbi or imam) will qualify as ‘students’, those attending seminaries or religious retreats which do not serve this purpose but are intended primarily to foster or reinforce faith, are not considered to be receiving educational or vocational training to an academic standard and will not qualify as ‘students’.
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 firstname.lastname@example.org, email@example.com and firstname.lastname@example.org. 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.
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.