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This VAT & Charities newsletter comments on the following:

1. Input VAT recovery: VAT incurred in relation to investment activity
2. Zero-rating the construction of a relevant charitable purpose building
3. Printed matter: zero-rated goods or standard rated service?
4. Whether local authority received services from its wholly owned not-for-profit company
5. Application of penalties by HMRC
6. Permission to appeal out of time 

Court of Appeal 

1. Input VAT recovery: VAT incurred in relation to investment activity 

The Court of Appeal has referred matters raised in The Chancellor, Master and Scholars of the University of Cambridge case to the CJEU for guidance. The Court of Appeal proposes to ask the CJEU for guidance on the following:

• Where management fees are incurred in relation to a non-taxable investment activity is it possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income?

• The Court of Appeal also seeks confirmation that its reading of the Sveda decision is correct and that no distinction is to be made between exempt and non-taxable transactions for deciding whether input tax is deductible.

CVC comment: the First Tier and Upper Tribunal previously ruled that VAT incurred in relation to investment management fees could be treated as residual input tax and recoverable to the extent that income derived supports taxable business activities. This is consistent with HMRC’s previously adopted policy and CVC’s experience. If you would like to discuss the recovery if VAT incurred by your organisation please do not hesitate to contact CVC. 

2. Zero-rating the construction of a relevant charitable purpose building

Wakefield College, a charity, appealed against the Upper Tribunal’s decision that construction services provided to it in the course of constructing a new building were not zero-rated for VAT purposes. The supply in the course of construction of a building intended for use for a relevant charitable purpose may be zero-rated. HMRC accept that up to 5% use of the building may be used for purposes other than relevant charitable (i.e. for business activities).

The issue in this case was whether subsidised fees charged to students prevents the zero-rate from applying because the subsidised income represents a business activity.

The Court of Appeal found that the supply of courses by Wakefield College to students paying subsidised fees is a business activity. The Court of Appeal provided the following reasons for its decisions:

• The sole activity of the College is the provision of educational courses, this is not an ancillary activity.
• The provision of courses to students paying subsidised fees is significant.
• The fees paid by subsidised students are significant in amount.
• The subsidised fees made a significant contribution to the cost of providing courses.
• The level of course fees was fixed by reference to the cost of the courses.
• The fees were not fixed by reference to the means of the student.

The College’s appeal was dismissed. 

CVC comment: Wakefield College previously won its case before the First Tier Tribunal; however, HMRC succeeded in appealing the FTT’s decision before the Upper Tribunal. This decision provides further clarification and indicators of ‘non-business’ activities for VAT purposes. The Court of Appeal considered the CJEU decisions in Borsele and Finland, as well as the decision in Longridge on the Thames.

First Tier Tribunal

3. Printed matter: Zero-rated goods or standard rated service?

The Tribunal had to decide if supplies by Paragon Customer Communications Limited (Paragon) to Direct Line Insurance Services (DLIS) amounted to, as Paragon contended, a single supply of booklets comprising of predominantly zero-rated matter or, as HMRC contended, a supply of services of which booklets were not a predominant element. It is also asserted by HMRC that some of the booklets supplied as zero-rated were in fact not supplies of printed matter and so should have been standard-rated.

Paragon supplied various items of printed matter in relation to insurance documents for DLIS including advertising, standard Terms and Conditions, appraisals and reminders. The question came before the Tribunal as a result of a VAT assessment on Paragon who HMRC contended was making a single, standard-rated supply of services based on the preparation and packaging involved in the process of supplying the products, the envelopes used and separate documents which were not part of the main supply i.e. the appraisals and terms and conditions documents. Paragon appealed this assessment by HMRC on the grounds that the supplies made were one composite supply of zero-rated booklets. This was, in essence, a question of single or multiple supply.

Whilst the Tribunal considered various cases, including the single supply criteria in Card Protection Plan and issues of divisibility considered in Levob Verzekeringen BV, the conclusion of the Tribunal was relatively clear; Paragon is successful in its appeal against the assessment. It is held that packaging and delivery of the disputed documents is, in this instance, considered to be a single, zero-rated supply of booklets.  

CVC Comment: this decision may have a wider implication, in particular for charities. Many charities cannot recover VAT incurred because of their non-business and/or VAT exempt activities. HMRC changed its policy some years ago with respect to the VAT liability of direct mailing services (standard rated). This decision may call into questions HMRC’s policy. It will be interesting to see if this decision is appealed by HMRC to the Upper Tribunal.

Court of Justice of European Union (CJEU) 

4. Whether local authority received services from its wholly owned not-for-profit company

A recent Hungarian case (Nagyszénás Településszolgáltatási Nonprofit Kft., C-182/17) before the CJEU concerned supplies between a local government (municipality) and its wholly owned non-profit making organisation (NFP). The NFP, under contract with the municipality, undertook to carry out certain public tasks such as management of housing and other property, management of local public roads etc. The NFP did not issue invoices to the municipality for the services nor did it charge VAT. The NFP argued that the contract did not constitute a contract for the provision of services. The NFP also argued it was a “body governed by public law” and, as such, if it is supplying services those services are VAT exempt.

The CJEU found that where a company performs public tasks under a contract with a municipality this constitutes a taxable supply of services subject to VAT. In addition, the NFP did not meet the conditions to be classified as a “body governed by public law”, it has none of the rights and powers of a local authority. The services supplied do not fall within the VAT exemption for bodies governed by public law. 

CVC comment: many local authorities sub-contract various responsibilities to charities and not-for profit organisations. Increasingly, charities enter into service agreements as opposed to receiving grant funding. It is important to consider the VAT implications of such contracts and agreements. If your organisation is entering into similar arrangements and the VAT treatment is not clear please do not hesitate to contact CVC.

First Tier Tribunal 

5. Application of penalties by HMRC 

Over recent years we have seen a growing trend by HMRC to apply penalties to VAT errors made by taxpayers. In the case of Curtises Limited we saw the interaction of the rarely used annual accounting scheme and the leveraging of a penalty by HMRC.

Curtises Limited was required to submit its VAT return covering the period 1 January to 31 December 2016 no later than 28 February 2017. It failed to do so and, as is usual practice for payment traders (those usually paying VAT to HMRC in each VAT accounting period) HMRC raised a central assessment on 17 March 2017. The central assessment issued was in the sum £35,578. The taxpayer’s payments on account during the year totaled £32,499. However, on 5 April 2017 Curtises Limited made a payment of £46,131.

HMRC contacted the company in May 2017 requesting submission of the VAT return. This was duly submitted (and paid) the following month with a net liability of £215,233.43 owing to HMRC.

HMRC treated the receipt of the VAT return as prompted disclosure i.e. the taxpayer did not submit its VAT return by the due date. It only did so following receipt of a centrally generated assessment by HMRC. HMRC issued a penalty calculated at 15% of the potential lost revenue. This was calculated as follows:

• Actual net VAT liability owing to HMRC: £215,233
• HMRC central assessment: £35,578
• Difference £179,655 x 15% = £26,948.25

The taxpayer lost its appeal. It explained that the business had expanded rapidly and it had found the growth difficult to deal with. It had a good tax compliance record generally; however, the judge found in favour of HMRC. The judge did comment that the quantum of the penalty for “a fairly minor mistake” did appear “harsh” but the law had been correctly applied.

CVC comment: this case deals not just with penalties but annual accounting and HMRC’s issuing of central assessments. Our recommendation is where a charity has a problem in submitting accurate VAT returns that the matter is pro-actively managed and dialogue entered into as soon as possible. In this case, the penalty may have been mitigated in full, or in part, if the taxpayer had contacted HMRC sooner.

First Tier Tribunal 

6. Permission to appeal out of time

Newcastle Under Lyme College (NULC) applied to the Tribunal for permission to bring a late appeal against a decision of HMRC to deny that construction supplies received during 2009 and 2010 should be treated as zero-rated.

NULC seeks to appeal HMRC’s decision dated 23 September 2014. NULC’s notice of appeal was filed on 6 February 2017, over two years out of time. NULC contends that a portion of the construction services supplied and received should be zero-rated on the basis that a portion of the building was intended for use solely for a relevant charitable purpose (RCP), namely, use by a charity otherwise than in the course or furtherance of business. This is on the basis that income received from ‘part-funded’ students is a non-business activity. There is litigation pending in this area in a number of cases, including Wakefield College which is the subject of an appeal to the Court of Appeal. Both NULC and HMRC agree that the case will be unarguable if the Court of Appeal upholds the Upper Tribunal’s decision in Wakefield College.

The Tribunal took into account the amount of VAT at stake in this appeal, why the delay in appealing occurred, as well as the fact that NULC has not presented a consistent case. The Tribunal made the point that permission to appeal out of time should only be granted exceptionally and it should not be granted routinely. Nevertheless, the Tribunal granted permission to NULC to bring a late appeal. The Tribunal considered this appropriate in order to deal justly with this case.

CVC comment: as the Tribunal has granted permission to bring a late appeal, NULC’s appeal will be stood behind the Court of Appeal’s judgment in Wakefield College. Wakefield College has lost its appeal before the Court of Appeal. Therefore, it seems likely NULC’s appeal will also fail. Nevertheless, this case presents an interesting insight into the matters the Tribunal consider in granting permission to appeal out of time. Any appeal lodged must be done so within strict time limits.

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.