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VAT & Charities – 2019 roundup
Thank you for subscribing to our VAT & Charities Newsletter. In this publication we cover some of the most important and interesting areas of VAT for charities that have arisen this year.
This newsletter covers:
- Does the welfare exemption extend to private companies?
- Supplies closely connected to the welfare exemption: payroll services for disabled people receiving financial assistance for independent living
- Supplies closely connected to the welfare exemption: children’s holiday camps
- Children’s nursery/crèche facility
- Whether college fees are ‘donations’
This year has seen a number of cases before the Tribunals on the subject of the VAT exemption for welfare services.
Does the welfare exemption extend to private companies?
The Learning Centre Romford (LCR) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which LCR receives funding. LCR had treated these supplies as VAT exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.
LCR argued that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.
LIFE Services provided the same type of care as LCR but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.
HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and LCR were held to be taxable. This overturned the First Tier Tribunal’s previous decision.
LIFE and LCR have appealed the decision of the Upper Tribunal. The hearing before the Court of Appeal is due to take place in February 2020.
Constable VAT Comment: This decision will be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, generating taxable supplies, this could be advantageous in producing a right to input VAT recovery.
Private companies supplying welfare services will be awaiting the outcome of the Court of Appeal’s decision.
Supplies closely connected to the welfare exemption: payroll services for disabled people receiving financial assistance for independent living
The case of Cheshire Centre for Independent Living (CCIL) concerned the liability of its supplies of payroll services to individuals with disabilities, which it believed to be VAT exempt. HMRC had ruled that the payroll services did not qualify for exemption as they were not closely associated with the provision of welfare services.
CCIL offer a payroll service. It enters into contracts with local authorities and individuals receiving funds for their care and deals with issues such as PAYE and NIC on behalf of clients. CCIL contended that this supply should benefit from VAT exemption as it is closely associated with a supply of welfare services. HMRC believed that this supply was secondary to a supply of welfare services and, therefore, should be standard rated as a “payroll service” akin to that which may be supplied by an accountant. This would, of course, have taken away 20% of the payments made to disabled individuals to support their independent living. Simply put, the individuals would have been left with less money to spend on receiving the support they need.
The Tribunal considered that the payroll service, whilst not being an end in itself, is a means for enabling the support of disabled individuals through the services of assistants as a part of the care plan for that individual. The Tribunal concluded that the supply was not a standalone supply, nor was it really capable of being one. Therefore, it allowed the appeal and stated that the services in question were indeed exempt as they were services closely connected with a supply of welfare services.
Constable Comment: Interestingly this case focused on funding provided directly to the disabled person but it acknowledges at least two other ways in which these funds are distributed; the money is held and distributed by the NHS or, alternatively, by an independent third party.
The VAT liability of similar services provided in these circumstances is not commented on in this case. Despite this, the result will, no doubt, create some uncertainty as to the VAT liability of the funds received by the charities on behalf of the disabled person. The treatment of such supplies and what constitutes “closely linked with a supply of welfare services” now requires clarification as it could have wide ranging impacts on a variety of service providers dealing with welfare. The Tribunal Chairman commented that: “The VAT position of supplies by the Appellant to Local Authorities is not before the Tribunal.” The issue was whether payroll service provided by the charity to the recipients of Direct Payments is exempt for VAT purposes. This point is not elaborated on, but it is not clear why there should be a difference in VAT treatment.
This case also serves as a reminder that HMRC construes the welfare exemption, amongst others, very narrowly. It is always recommended that, when seeking to rely on a VAT exemption, professional advice should be sought.
A final point of interest is that it took 6 years for this case to be heard. HMRC issued its decision in January 2013 and the case was heard over two days in January 2019. Constable VAT has been advised by HMRC Solicitor’s Office that The Commissioners have sought leave to appeal the decision of the First Tier tribunal to the Upper Tribunal.
Supplies closely connected to the welfare exemption: children’s holiday camps
This appeal concerned an application made by RSR Sports Limited (RSR) for repayment of output VAT which it believed it had paid incorrectly. The application for repayment was based on the belief of RSR that its supplies were VAT exempt and that it had treated its supplies as taxable (standard rated) in error. HMRC argued that the supplies did not benefit from the VAT exemption for supplies of welfare services and, therefore, that VAT was correctly due on all of the supplies in question made by RSR. The VAT incurred was £229,000 which was declared over a four year period.
RSR trades as Get Active Sports and provides various services such as; after-school clubs, school holiday camps, childcare before and after school hours. It also provides staff to schools to cover teachers and to assess pupils. The supplies in question were the holiday camps provided for schools. RSR believed that these were services closely concerned with the care or protection of children and were “welfare services” for the purposes of the VAT exemption.
After some discussion of relevant case law, it was decided that the supply being made by RSR was a single supply. The question before the Tribunal was whether it was a single supply of activities for children, with an ancillary element of childcare, or vice versa. It is worth noting that there was no debate around whether RSR was eligible to make exempt supplies or around the interpretation of the exemption: the sole issue is the nature of the single supply being made.
A key factor in the decision was the fact that staff did not hold coaching qualifications and that activities which were made available for the children were not performed to any external standard. The Tribunal supposed that this was indicative of the fact that the main aim of the camps was to provide childcare for the children and not to provide the activities themselves. RSR’s supplies were therefore VAT exempt childcare.
Constable Comment: The considerations made by the Tribunal were quite lengthy for a decision of this nature and merit a read if the situation applies to your business or charity. The findings, and the reasoning for each finding, are set out individually in a helpful way.
This case turned on very specific facts and, on face value, appears to contradict some previous case law and HMRC’s general position. Whilst exemptions must be applied narrowly, this shows that there is scope for a sensible dialogue around these issues rather than a restrictive approach which has been taken in the past. In reality, the parents were paying for RSR to look after their children whilst they were at work, not for their children to participate in specific activities. This is a decision of the First Tier Tribunal only and it remains to be seen whether HMRC will appeal the decision to the Upper Tribunal.
Children’s nursery/crèche facility
The case Yeshivas Lubavitch Manchester (YLM) concerned the VAT liability of construction costs incurred by it when constructing a new building for its school to use. YLM owns and maintains Oholei Yosef Yitzchok (OYY), which provides a day nursery for boys and girls between the ages of 3 and 5 and a day school for girls aged 5 – 16.
HMRC disputed whether the building was for a “relevant charitable purpose” for the zero-rate to apply as YLM received money from parents in exchange for providing a children’s nursery.
HMRC sought to argue that the use of the building would be a business use rather than a non-business charitable one. Readers may remember the decisions in both Yarburgh and St Paul’s, which led to HMRC’s Business Brief 02/05, commenting on whether charities which offer nurseries/creches would be regarded as being in business for VAT. HMRC believed that this was not applicable in the present case as OYY also provided a day school and OYY ran things differently to the way Yarburgh did.
The Tribunal considered a wealth of case law to establish whether YLM/OYY was in business. In considering Wakefield (our coverage here), the Tribunal observed that HMRC accept that up to 5% business use of a building can be ignored as de minimis. It was accepted that any office use of the building would be less than 5% of the overall use of the building so, following Wakefield, the question was whether or not OYY were in business purely through operating the nursery. Various factors were weighed against each other to establish if the nursery was run “in return for remuneration”.
After significant consideration the Tribunal reached the conclusion that the nursery was not a business activity and, therefore, that the construction work qualified for the zero-rate of VAT. However, it was also confirmed that any work which was carried out to the existing structure should be standard rated. The key factors in concluding as it did seem to be that the nursery is run on a not for profit basis. A “significant number” of children using the charity’s services are from disadvantaged families. In November 2018 a total of 36% of parents were paying reduced or subsidised fees.
Constable Comment: The conclusion is pleasing to see as it confirms that the Tribunals are willing to find room for the judgments in Wakefield and Longridge to exist alongside the ruling in Yarburgh. This will be a welcome decision for many charities who are not on all fours with the judgments but operate a broadly similar model. Despite the fact money was received in exchange for the provision of the nursery, and the Tribunal agreed it wasn’t a donation, when the whole picture was considered it was apparent that the activity was charitable and not business. The area of business/non-business is particularly grey with a vast wealth of case law muddying the water significantly and HMRC have been observed by this firm to use cases such as Finland and Borsele to make opposing points. At best this shows that HMRC also finds the area challenging.
Paragraphs 122 and 123 of the judgment are interesting and useful in demonstrating the way in which Tribunals will consider the question of business/non-business. Whilst HMRC argued that OYY took a lot more in fees than Yarburgh or St Pauls, the Tribunal found that this was not strictly relevant as it was the basis on which the fees are charged that is important and OYY sought only to cover costs; “…the difference between the two cases seem to be differences of scale or degree rather than of principle.” This is, overall, a positive result for charitable nursery operators who benefit from their supplies being regarded as non-business. However, it should also be remembered that this is a decision of the First tier Tribunal so does not create a binding precedent. It will be interesting to see if HMRC appeals this decision.
Whether college fees are ‘donations’
The appeal by Madinatul Uloom Al Islamiya (The College) was against a decision by HMRC that construction services received by The College did not qualify for VAT zero-rating.
This is an issue which has been in the Courts a lot in recent years, cases such as Longridge and Wakefield considering whether a charity is operating a business or “economic activity”. In this instance, The College operated a boy’s residential Islamic faith school where attendees are taught the national curriculum and Islamic Studies. The College is fee-paying and sets this fee by reference to other similar residential faith schools.
The College built a new multi-functional hall. It issued a certificate to the contractor confirming that the hall would be used for a relevant charitable purpose (RCP) insofar as it would be used for solely non-business purposes. Whilst the Tribunal considered several issues such as whether the hall was a building and, if so, whether it was an annexe, the point on which the case turned was the RCP point. There were comparisons with the Yeshivas Lubavitch judgment to be made in considering whether The College was operating an economic activity. In that case, it was held that the zero-rate could apply to a similar situation.
The College argued that its fees were donations. If a pupil’s parents/guardians could not afford to make a payment, generally the debt was not pursued where there were good reasons. HMRC disagreed with this analysis. The Commissioners argued that the money received by The College represented consideration for a supply of education and that it was not a donation. Merely failing to pursue a bad debt does not make it a donation. The Tribunal observed that, whilst The College did receive substantial donations from the religious community, these donations were distinct from the fees charged and that this was reflected in The College’s financial statements. Considering that the fees charged are significant “in amount and in aggregate” and that the fees received make a significant contribution to the cost of providing the education, the Tribunal ruled that this hall was not constructed for a RCP and, therefore, that VAT was due on the construction costs.
Constable Comment: This case is yet another in a long string of business/non-business decisions relating to the construction of buildings. What has become clear throughout the last few years with all these judgments is that HMRC are particularly restrictive in accepting the applicability of the zero-rate for a building to be used for non-business purposes. Whilst the ruling in Wakefield re-opened the door to a contextual approach to deciding if an activity is “economic” in nature, it still appears a particularly grey area of the law.
Royal Opera House concerned the recoverability of VAT incurred by the Royal Opera House Covent Garden Foundation (The Foundation) in relation to productions which it put on and charged for admission to. It was accepted that admission to the events was exempt for VAT purposes owing to the cultural exemption. However, the Foundation sought to argue that some of its production costs had a direct and immediate link with taxable supplies it made, such as catering income and ice cream sales, meaning that some of the VAT incurred should be recoverable as it related, in part, to taxable supplies being made.
The issue which arose was whether costs incurred had a direct and immediate link with the following, taxable, supplies:
- Catering Income
- Shop income
- Commercial Venue hire
- Production work for other companies
- Ice cream sales
If there were such a link found then the costs would have been residual for partial exemption purposes meaning that a percentage of the input VAT could be recovered in line with the percentage of the overall supplies made by the Foundation which were taxable: 30% taxable sales would lead to 30% input VAT recovery on residual input VAT.
The Court observed that, as per case law, the decisive factor in determining a direct and immediate link is that the cost of the input transaction, in this case the production costs, is incorporated in the cost of the individual output transaction, in this case the taxable supplies. Each type of taxable supply was assessed individually in order to establish whether the production costs were incorporated into the supplies.
Catering income was found to have a direct and immediate link with the production costs, a conclusion aided by the fact that restaurant menus for more expensive evenings are set at higher prices. It was also concluded that for ice cream sales, similarly to supplies of catering, there is a direct and immediate link. Therefore, The Foundation will be able to treat the income VAT associated with these supplies as residual for the purposes of partial exemption; put simply, it can now recover more input VAT.
However, not every conclusion went in favour of The Foundation. Where the supplies of catering and ice cream sales were largely dependent on the productions being staged by the Foundation, and the costs were incorporated into the price of attending the event, the shop sales, commercial venue hire and production work for other companies were found not to be. It was considered that the costs of production were not “bundled” into the income derived from these streams. Therefore, there is not a sufficient link between the production costs and these taxable supplies to give rise to input VAT recovery as they relate to the exempt supply of admission to a cultural event.
Constable Comment: Where previous case law has observed that a direct and immediate link is established simply through the bundling of costs into the ultimate charge made to the consumer, this case was interesting in seeming to deviate somewhat from this precedent; assessing more where there is a business link between the cost and the supply.
For example, with regard to the catering, it was observed that few people would attend the Royal Opera House merely to eat dinner. People ate there as part of their evening and would not, but for the performance, be buying food in that restaurant. The logic for the ice cream sales was the same despite there being little discussion around the income from ice cream containing an element of the cost of the production.
Whilst this was not a total victory for the Foundation, the decision heralds a welcome shift away from HMRC’s rigid application of the “direct and immediate” criteria that costs be bundled into the final charge to the consumer. We await to see if HMRC will appeal this decision further.
University of Cambridge concerned the deductibility of VAT incurred by it in relation to fees incurred on investment management. The University receives donations and endowments as part of its financing, when these payments are received, the amounts are paid into an investment fund which is managed by a third-party fund manager. The University submitted an application to recover this input VAT as, it believed, the income generated was used to fund the whole range of its activities. Therefore, the input VAT was reclaimable in line with the University’s partial exemption as a general overhead.
The FTT and UT had found in favour of the University. The Court of Appeal referred the matter to the CJEU for clarification as to whether a taxable person, carrying on both taxable and exempt activities, invests donations received by placing them into a fund and uses the income generated to cover the costs of all of its activities is entitled to deduct as an overhead input VAT paid in respect of the costs associated with that investment.
Only activities which are economic in nature give rise to a right to deduct VAT incurred and, moreover, in order for a taxable person to have a right to deduct VAT, there must be a direct and immediate link between a particular input and output transaction. Therefore, the Court observed that it is necessary to determine whether the collection of donations, and their subsequent investment, constitutes an economic activity.
Reflecting on this point, the Court posited that, when collecting donations, the University is not acting as a taxable person as there is no supply in return for a consideration. It follows that the input VAT paid in respect of any costs incurred in connection with the collection of donations is not deductible. For VAT purposes, there is no regard paid to the reason why the money was received. Therefore, the VAT was not recoverable by the University.
Constable Comment: This decision deals with the matter of the recovery of VAT incurred on investment management fees. The key point is whether a charity can consider the costs as an overhead of its business activities or solely a direct cost of a non-business investment activity. In this case, the CJEU found that the costs were not an overhead of charitable activities but were directly related to the non-business investment activity and not the making of any taxable supplies.
We understand that some charities had submitted protective input VAT claims on the basis of the First and Upper Tier Tribunal decisions in this case. Those charities may now wish to reconsider the position and may feel it appropriate to notify HMRC of an error correction. HMRC may pursue and issue VAT assessments against charities who have been making partial input VAT claims on investment management fees.
Whilst this decision concentrates on a narrow point, there is obviously concern about the possible broader effect this decision may have on HMRC policy. Following the High Court decision in
Church of England Children’s Society in 2005 (and HMRC Business Brief 19/05) there has been an assumption that where VAT has been incurred on fundraising costs, that VAT is partially recoverable via the agreed input VAT recovery method on the basis that the funds are not restricted to support only non-business or VAT exempt business supplies but are also supporting taxable business activities.
This firm confirmed with HMRC in 2011 that this principle still applied. The CJEU decision in this case may cause HMRC to revisit the position and we would recommend all charities claiming VAT incurred on fundraising costs refresh their specific circumstances.
Cheshire Centre for Independent Living HMRC has been granted permission to appeal.
The Learning Centre (Romford) Ltd and L.I.F.E. Services Ltd appeal to be heard by the Court of Appeal 12 February 2020.
Royal Opera House Covent Garden Foundation HMRC has been granted permission to appeal the points it lost.
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, those working overseas, and regionally based local 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.
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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.