Well it’s been a tumultuous time to say the least since the last Newsletter. We shared our thoughts on VAT and the referendum result last week here. The only thing that’s clear is that things are going to be very uncertain for a while yet. In the meantime, there’s no change to UK VAT – or rather only the sort of challenges and opportunities that VAT has always brought with it.
What constitutes a donation for VAT purposes?
Friends of the Earth sought to claim input tax on the cost of training street fundraisers whose role was to sign up members of the public to make regular direct debit payments to the charity. Those who signed up to regular payments exceeding £3 per month received ‘Earthmatters’ magazine and a variety of other benefits, including discounts and a track from the charity’s music site.
The question before the Tribunal was whether the £3 payment was given ‘for’ the benefits, or whether the £3 was a donation with the benefits being freely given by the charity. The charity argued that the £3 was payment for the taxable supply of the benefits, albeit that the supply was wholly or overwhelmingly zero-rated (the supply of printed matter). If the £3 was a donation and outside the scope of VAT, no VAT could be claimed on the fundraising costs.
The Tribunal looked at the facts and decided that the monthly payment was not paid ‘for’ the magazine and the benefits, instead the payment was a donation or gift to the charity. There was insufficient evidence to show that a supporter was made aware when signing up of any benefits that were on offer. Instead the magazine was mentioned in the welcome letter and direct debit confirmation that was sent out after the supporter signed up. It made no difference that the charity would only send the magazine if someone paid the minimum sum of £3 – it was still a donation. The Tribunal therefore did not need to go on to decide whether the supply would have been wholly or mainly zero-rated.
Why it matters
This case demonstrates the uncertainty over the distinction between taxable supplies and donations, and that every case is decided on its own facts. Had the charity ensured that its marketing material and the documents completed by the street fund raisers made it clear to supporters that they were paying to subscribe to a magazine and other benefits, then the Tribunal may have reached the conclusion that the £3 payment was ‘for’ the benefits and not a donation. The charity is considering whether to appeal.
School holidays not exempt welfare
A company operated camps on school premises during school holidays for 3-17yr olds in which the children could take part in activities such as sport, singing and dancing, painting and drawing. The company sought to argue that its services were exempt from VAT on the basis that the camps constituted welfare services. The camps were registered with Ofsted and it was accepted that the company was a ‘state regulated private welfare institution or agency’.
The Principal VAT Directive exempts ‘the supply of services and goods closely linked to the protection of children and young persons…’ , HMRC accepted that there was some care provided to the children, but took the view that the company’s primary aim was to offer sport and activities, and hence the exemption did not apply.
The Tribunal considered that the company was making a single supply of services. It had to decide whether the camps provided care and protection to children or the provision of various activity based courses. It looked at the company’s website which set out the nature of the services provided at the camps and noted that the company recruited ‘excellent coaches’ to deliver structured sport, art and fun activities to groups of children. It therefore concluded on balance that the single supply was the provision of the various activities rather than the care or protection of children.
Why it matters
The exemption for welfare services has been the subject of many appeals over the years and this case highlights the difficulty in establishing whether it will apply when there are a range of services/activities on offer. In this case, HMRC had conceded that there was an element of care and protection to the youngest children, but that was not sufficient for the Tribunal to find that the predominant supply was exempt.
VAT recovery not restricted by sale at less than cost
A Dutch local authority constructed two buildings for multipurpose use and recovered the VAT on the costs. It sold the buildings to a foundation for around 10%of the cost price, which in turn allowed free use of part of the buildings to institutions providing education. The other parts were leased to third parties in return for consideration- these supplies were exempt. The Dutch tax authority sought to restrict input tax recovery.
The CJEU was asked to consider whether the taxpayer was entitled to full recovery of VAT on the cost of constructing the buildings or only in proportion to the part that was used by the foundation for economic purposes. It decided that although the taxpayer sold the buildings for less than it cost to construct them, it made a taxable supply and could reclaim all of its input tax. It also made no difference what the purchaser used the buildings for.
Why it matters
This case reinforces the point that the right to input tax recovery does not depend on whether there is any profit made by the taxable person making the supply. As long as there is a consideration received for a taxable supply and it is not ‘purely symbolic’, input tax can be reclaimed. Nor does the VAT Directive impose any conditions concerning the use by the taxable person’s customer, as that would mean that the taxpayer would suffer restricted deduction if making supplies to private individuals or non-taxable persons.
What is a dwelling?
The First Tier Tribunal has held that a property converted from a commercial building into domestic property for multiple occupation can constitute a ‘dwelling’ for the purposes of Grp 5 Sch 8 VAT Act 1994. In this case, a company purchased a commercial property and registered for VAT on the basis that it was going to convert it for sale, into a single residential property. After HMRC queried input tax recovery the company then advised HMRC that the property was to be sold as a single residential property, but with multiple occupancy and some shared facilities. Although none of the ten rooms had washbasins, four were en-suite and there were two bathrooms for the six remaining occupants. The property was centrally heated by a single boiler and heating and other utility costs were to be included in an all-inclusive sum paid by each occupant. There was a communal kitchen for the use of all residents although there was nothing to prevent them from cooking in their individual rooms. The property had a front and rear entrance/exit and each room could be locked with its own key. HMRC then sought to argue that the sale was excluded from zero-rating and was exempt, (with the result that no VAT could be reclaimed on the redevelopment). This HMRC said was because the ten occupational units in the property did not constitute ‘self-contained accommodation’. The Tribunal held however that the property as a whole constituted ‘self-contained accommodation’ so that the first grant of a major interest in the whole property was zero rated.
Why it matters
VAT legislation does not provide any general definition of a ‘dwelling’; the word seems simply to mean a place where someone dwells and which they treat as home. In practice the definition creates some confusion. This appeal was only concerned with the condition as to whether a property with multiple occupancy consists of ‘self-contained accommodation’ and therefore potentially benefit from zero-rating. The tribunal held that although there was no express mention of multiple occupancy dwellings in the relevant part of the legislation, it did not specifically rule them out. The purpose of the legislation was to zero rate the creation of new homes where none had existed before, and therefore, applying a purposive construction to the legislation, the tribunal held a property with multiple occupancy could be a dwelling within the zero rating provisions.