Membership Subscriptions and VAT – the Harley Davidson case

Membership subscriptions are always an area of contention for charities. Some charities benefit from a VAT Extra Statutory Concession for non-profit membership bodies under which HMRC allow subscriptions to be apportioned to reflect the underlying VAT treatment of the specific benefits. This is useful where the benefits include printed material which is generically zero rated, and which allows for a reduction in VAT charged on the subscription. Alternatively where the benefits would otherwise be exempt, it increases VAT recovery on costs.

HMRC have recently argued that this concession only applies to formal membership bodies whose members are able to vote (e.g. at AGMs) and cannot apply to ‘friends’ and ‘patron’ schemes. In addition, HMRC have also tended in recent years to argue that ‘membership’ is a single supply which is essentially standard rated, unless the predominant benefit is printed matter. The 2015 Serpentine Gallery tribunal decision supported HMRC’s view; the tribunal asserting that supporters were not members, and that the ‘basket of supplies’ they received was a single (or ‘composite’) standard rated supply of ‘association’ with the Gallery.

But with the Harley Davidson tribunal case there is now some more encouraging news for charities who operate membership schemes without that level of member involvement, and whose use of the ESC might therefore have been challenged. Harley Davidson won on the basis that the package of benefits arising from payment of its membership fee could be treated as a multiple (or ‘mixed’) supply where every element is afforded its own VAT treatment. The case considered whether under VAT law, not concession, their membership subscription was apportionable to reflect different liabilities such as printed magazines. The tribunal found as a fact that it was apportionable.

This is an important case, and we await news of whether HMRC will appeal. It is possible that they will not, hoping that this will mean that they can argue Harley was decided on its facts. Many charities operating membership schemes may however be closer to the Harley fact pattern than to Serpentine. Unless HMRC appeals successfully, it may be easier for charities to argue that they need not rely on the ESC (and thus do not need voting members) as the supply can be apportioned as a matter of VAT law. We await further developments, but in the meantime please get in touch if you wish to discuss your circumstances.

UK VAT exemption for welfare services incompatible with EU law?

The First Tier Tribunal (FTT) has suggested, not for the first time, that the UK exemption for welfare services is in breach of EU law, so taxpayers supplying services may be entitled to invoke exemption under the principle of direct effect

Learning Centre (Romford) Ltd (TLC) provided education, activities, and entertainment to vulnerable adults with learning difficulties during working hours, Monday to Friday. TLC provided the students attending the centre with meals, including assistance with eating where required, administered medication, and personal care.  HMRC accepted that TLC provided ‘welfare services’ but did not agree that TLC met the conditions to exempt those services from VAT. Under UK legislation welfare services are exempt only when supplied by charities public bodies and “state regulated private welfare institutions or agencies”. HMRC did not accept that TLC was state regulated.

The Tribunal agreed that TLC was not state regulated as defined by the legislation, but went on to rule that the UK has unlawfully exercised the discretion conferred on it by the EU VAT Directive in choosing the regulation of welfare facilities as the criterion by which suppliers devoted to social wellbeing are ‘recognised’ for exemption, because the law on regulation could lead to discrimination in VAT treatment between identical services. It ruled that as the UK’s implementation of the welfare services exemption was unlawful, the company was entitled to rely on the direct effect of the VAT Directive and as a body devoted to social wellbeing its supplies were, and always have been, exempt.

Why it matters: This decision could be very significant for other providers of welfare services, but it seems likely that HMRC will seek to appeal, having done so in an earlier case where the FTT came to a similar conclusion for different reasons. It remains to be seen whether this kind of distortion will be left in UK VAT legislation when we exit the EU.

Is student accommodation a ‘dwelling’?

A recent case has highlighted some important VAT differences that constractors and sub-contractors need to be aware of between types of student accommodation.

Summit Electrical Installations (SEI) had acted as a sub-contractor during construction of a block of studio flats for students. The flats were to be made available to purchasers on a buy to let basis, but the planning permission restricted occupation of the flats to students of two local universities. Student accommodation is commonly referred to as ‘Relevant Residential’ (RR) accommodation and construction of RR accommodation is zero rated only where the main contractor/ developer is issued with a certificate by the building owner.  The main contractor had incorrectly supplied SEI with a zero-rating certificate and SEI had zero rated its work.

HMRC assessed SEI for VAT and SEI appealed after it was unsuccessful in attempting to recoup the VAT from the main contractor. SEI argued that it could zero rate its work because

  • the student accommodation here consisted of a number of individual ‘dwellings’ which did not require a RR certificate; and
  • there was no restriction upon the separate use or disposal of the flats, even though planning meant that the use was restricted to use by students so they met the criterai to be ‘dwellings’.

The tribunal agreed with SEI and agreed that it could zero-rate its services.

The key difference between a RR building and a dwelling is that sub-contractors can zero-rate qualifying work in the course of construction of new dwellings, but not in the course of construction of a RR property. HMRC’s guidance states that, in such situations, the main contractor determines which type of zero-rating should apply. However, the FTT found that there was no legal basis for this approach and that any sub-contractor can determine for themselves whether they are working on a ‘dwelling’, and zero-rate their supplies regardless of whether the main contractor considers that it is supplying a dwelling or an RR building. HMRC may yet appeal the decision but the case highlights the need for both contractors and sub-contractors to be aware of the VAT implications of the design of buildings.

If you woud like more information contact Soc or Linda.

VAT – care homes and hospitals

In Revenue and Customs Brief 2 (2017) HMRC announce they have revised their policy on the definition of ‘personal care’ for the purposes of deciding when a new building can qualify for zero-rating as a care home, or is treated as a standard-rated hospital.

Following the decision of the First-tier Tribunal in Pennine Care NHS Trust (TC04998), HMRC now accepts that besides providing for lengthy periods of residence, ‘personal care’ in a care home may also involve a high level of medical treatment. A treatment centre incorporated within a care home and used at least 95% by the residents of that home will qualify for zero-rating. Businesses may be able to recover VAT previously paid on supplies of construction works which would have been eligible for zero-rating under the revised policy, subject to the four-year limit on claims.



College’s ancillary activities are ‘closely related’ to education

On 4 May the CJEU held that Brockenhurst College’s supplies of catering and entertainment services, when proivded by students as part of their courses, are closely related to education and exempt.

The case concerned charges the College made for meals prepared and served by students as part of catering courses and for tickets for student performances which were also intended to give students an opportunity to develop their skills.  The question was whether these were taxable, since the recipients were not students, or whether they were exempt, because the purpose of the activities was to further the education of the students – and thus were ‘closely related’ to the College’s educational supplies.

The CJEU has agreed with the First and Upper Tribunal and ruled that the charges are exempt. The Court decided that ‘closely related’ was  the same as ‘ancillary’ and thus the catering and entertainment was not an end in itself, but supported the principal supply of education.  The legislation does not require these ancillary supplies to be made to the student in situations where the supplies are for the purpose of enhancing the student’s education, and did not generate additional financial resources, and as long as the activity did not compete unfairly with other commercial businesses.

The Court found that in this case the College’s customers were always associated with students or the college, and there was no general admission for the public.  The catering and performances were not to professional standards, and the main reason they were undertaken was to develop the students.  As such the activities were unlike their commercial equivalents which benefit only the consumer, and thus there was no unfair competition.

Furthermore, the College charged only 80% of the costs, so there was no intention to raise funds in relation to the activities. As the motive was to educate the students the supplies were exempt provided that such activities are essential to the students’ education and their basic purpose is not to obtain additional income for that establishment by carrying out transactions in direct competition with those of commercial enterprises. On the latter point the ECJ ruled that it is for the national courts to determine and this will therefore be referred back to the Court of Appeal.

Any educational bodies which have not already made protective claims to HMRC for overpaid VAT on such supplies should now do so.

VAT deduction on works carried out under planning gain agreements

The Advocate General (AG) opinion in the Bulgarian case of Iberdrola Inmobiliaria Real Estate Investments (“Iberdrola”) has called into question the UK’s treatment of VAT incurred on works under planning gain agreements. It has also led to some contrasts and questioning on effect of the Sveda case.

Iberdrola constructed a holiday village from which it intended to make taxable business supplies. The site needed a connection to the existing municipal waste-water pump station, The pump station was in need of renovation and Iberdrola agreed, as part of the planning consent, to repair and upgrade it for the local authority. It instructed a building contractor to carry out the works, on which it recovered the VAT. The tax authority denied the VAT repayment on the basis that the VAT was not incurred by the Iberdrola for its business purposes.

The AG’s opinion was that European legislation does not permit the deduction of VAT on services which are provided free of charge directly to a third party for its purposes, even where the person incurring the costs was motivated by business reasons. Whilst the AG accepted that there was some benefit to Iberdrola in incurring the costs, the supply by the  contractor was to the local authority. Therefore, Iberdrola was not entitled to deduct the VAT incurred on works to the pump station.

Furthermore, the AG contrasted the facts here to the case of Sveda, because in that case the taxpayer did not pass on the benefit of having a culture trail constructed to another party but used the trail to benefit its own business by allowing potential customers of its retail activities to use it free of charge. So, in Sveda, the costs were overheads of the taxpayer’s business.  Iberdrola did not use the renovated infrastructure in the context of its own business but passed on the benefit of them to the local authority. It is expected the CJEU will decide on this case later this year.

Why it matters While the AG’s opinion provides an indication of the judgement of the CJEU it is possible that the CJEU will not follow the AG’s opinion This decision could impact property developers and housebuilders in the UK who enter into planning gain agreements (section 106) with local planning authorities to provide infrastructure. Presently in the UK HMRC allow VAT recovery on such works.

Article 50, the Repeal Bill and the future of VAT

At the end of last month the UK formally triggered Article 50 and the Government published a White Paper on the Repeal Bill, which has clarified how the UK will treat existing European Case law after the UK leaves the EU. This will impact on the future of VAT. Details of the repeal bill can be found here


Currently the European Communities Act 1972 (ECA) gives effect to EU treaties in UK law and provides for the supremacy of EU law. It also requires UK courts to follow the rulings of the Court of Justice of the European Union (CJEU). Some EU law applies directly without the need for UK implementing legislation, but other parts of EU law have to be implemented in the UK through via domestic legislation.

The intention is that the Repeal Bill will repeal the ECA. It will also convert EU law into UK law as it stands at the point of the UK’s exit from the EU. This will give some certainty to businesses and allow them to continue operating in the knowledge that rules will not change significantly and suddenly on the UK’s exit from the EU. It will then be down to Parliament or where appropriate, the devolved legislatures, to amend, repeal or change any piece of EU law (once it has been brought into UK law) once the UK is out of the EU.

The Bill creates powers to make secondary legislation to enable corrections to be made to laws that would otherwise no longer operate appropriately once the UK leaves the EU and will also enable changes to domestic law to reflect the content of any withdrawal agreement made under Article 50. It will also give the UK Government once we havelef the EU powers to change the scope and operation of domestic VAT .

Existing EU case law

Following the EU referendum, there had been significant speculation and varying views on how the UK would treat existing CJEU case law, and its impact on the UK tax legislation once  the UK leaves the EU. The repeal bill clarifies that  case law precedent from the CJEU will continue to apply (for a time at least) and that any uncertainties/disagreements over the meaning of UK law after the UK leaves the EC derived from EU cases will be decided by reference to the CJEU case law as it exists on the day the UK leaves. So the European Court of Justice will no longer have any jurisdiction in the UK, but its existing case law, up to the date of withdrawal, will continue to be binding on UK courts as they interpret EU law that has been converted into domestic law.

The bill  is therefore  likely to give CJEU case law similar precedent status to decisions of the UK Supreme Court and both HMRC and appellants  may continue to rely on case law as they have up to this point.  After exit UK legislation (including that relating to UK VAT) passed by Parliament will take precedence over preserved EU-derived law and thus UK VAT and tax law is likely to start to diverge from EU law gradually as UK case law develops. The Office of Tax Simplification  is also currently considering changes to UK VAT that could be made once the UK exits the EU.

Customs issues

Some bills will be necessary to ensure the law continues to function properly from day one, and this includes a Customs bill to establish a framework to implement a UK Customs regime, because this cannot be met by incorporating EU law.

The likelihood is that a Customs border will come into existence early in 2019 with the potential to cause disruption to movement of goods coming in and out of the UK. It is hoped that the Government will publish proposals as soon as possible. The Customs Declaration Services (CDS) programme was intended to replace the existing system for handling import and export freight (CHIEF) from January 2019. Now that the Government has made a decision to leave the EU Customs Union, there is serious concern that this project will be in place on time.

There is still much uncertainty which can only be addressed when the terms of the UK’s departure from the EU are clearer.

EU Judgment: Member States can decide which supplies of cultural services may be exempt from VAT

On 15 February 2017, the Court of Justice of the European Union (CJEU) released its decision in the British Film Institute’s (BFI) UK VAT case concerning HMRC’s decision to refuse BFI’s claim for overpaid VAT in the period 1990 to 1996 on the sale of tickets for admission to screenings of films.

The First-Tier Tribunal had held that admission to a cinema or other venue showing films by a non-profit making body and registered charity, was a cultural service for the purpose of Article 13A(1)(n) of the Sixth Directive, now Article 132(1)(n) of the VAT Directive (Directive) and that in the absence of domestic implementing legislation during the claim period, the EU provisions had direct effect. Thus in its view BFI’s film admission income was exempt from VAT.

The Upper Tribunal upheld this decision and HMRC appealed to the Court of Appeal. The Court of Appeal referred the case to the CJEU asking whether the cultural services exemption has direct effect, so as to
exempt BFI’s supplies in the absence of any domestic implementing legislation. The referral also asked whether any discretion is given to Member States to discriminate between cultural services in their application of the exemption.

The CJEU, agreeing with the Advocate General (AG), found that where the subject matter of the provisions of an EU directive appear to be unconditional and sufficiently precise, they may be relied upon before the national courts by individuals where the Member State has failed to implement the directive in domestic law within the period prescribed or where it has failed to implement the directive correctly. However, in the current case the exemption laid down in the Directive refers only to ‘certain cultural services’ and the Directive does not specify which cultural services the Member States are required to exempt. The CJEU held that as Member States have discretion in the application of the exemption for cultural services, the Directive cannot be relied on directly by a taxable person. That meant HMRC’s interpretation of the EU provision applied.

Why it matters: This judgment is disappointing for those hoping to widen the narrow interpretation the UK placed on the exemption- for example those operating botanical gardens and holding events that may be cultural but are not theatrical, choreographic, or musical. It confirms that HMRC does have discretion to allow exemption for some cultural services whilst taxing others. Post Brexit however, there could be an opportunity for those in the cultural charity sector to lobby for an amendment to the UK legislation.

C-592/15 British Film Institute

Mercedes Benz Italia: when finance activities are ‘incidental’

In Mercedes Benz Italia SPA (C-378/15) the CJEU considered the deductibility of input VAT when a company makes partially exempt supplies. Mercedes Benz Italia’s (MBI) main activity related to marketing the group’s brands in Italy. However, over 70% of its turnover came from exempt interest on loans made to its subsidiaries. MBI was required to calculate the proportion of input VAT recoverable based on the turnover of taxable supplies as a proportion of total supplies (ignoring incidental finance transactions). MBI argued that the Italian method used to calculate deductible VAT (where the interest was included in the calculation ) was incorrect and that its finance activities were incidental financial transactions under article 174(2) of the Principal VAT Directive and should be excluded.

The CJEU held that the level of turnover generated could be an indication of whether transactions were incidental. However, the fact that financial transactions generated a higher turnover than MBI’s main activity was insufficient in itself to prevent those activities from being incidental. The activities would still be classified as incidental if they did not constitute the ‘direct, permanent and necessary extension of the business’ and if they did not entail ‘a significant use of goods and services subject to VAT’.

Why it matters

This is a significant decision for partially exempt businesses using the standard partial exemption  method. When the standard method is used incidental real estate and financial transaction supplies can be excluded from the turnover calculation. The judgment suggests undue emphasis should not be placed on the level of turnover generated by those activities in comparison to the company’s main activities (although this may still be indicative of whether transactions are incidental). Businesses arguing that such activities are incidental should instead be prepared to show that there is no close relationship with their taxable activities and that the incidental activities make only limited use of the goods and services on which input VAT is incurred. Businesses may also seek to agree specifically how to allocate their input VAT based on use, via a partial exemption special method.


Services closely related to education – exemption

The Advocate General’s opinion has been released in the Brockenhurst College case (C-699/15). This was a UK referral asking whether supplies of restaurant and entertainment services made by a college to paying members of the public (who were not the recipients of the college’s principal supply of education) are ‘closely related’ to the provision of education, and therefore exempt from VAT under EU law. The supplies were made or facilitated by the catering and performing arts students (being the recipients of the college’s principal supply of education) as part of their courses, and were an essential part of their education.

Brockenhurst operated a restaurant in which catering functions were undertaken by students under the supervision of their tutors. The restaurant charged for the meals at subsidised rates.The college’s performing arts  students  aslo staged concerts and performances for paying members of the public.

The First-tier Tribunal (FTT) had ruled that the supplies of restaurant and entertainment services by the college to members of the public were exempt from VAT as supplies of ‘services closely related to education’ and on appeal by HRMC the Upper Tribunal upheld the decision. The Court of Appeal decided to refer questions to the CJEU for a preliminary ruling.

The AG  stated that the Directive does not define the concept of supplies ‘closely related’ to education. But it is clear from the actual wording of the provision that it does not cover the supply of goods or services which are unrelated to ‘children’s or young people’s education, school or university education, vocational training or retraining’. Furthermore, the supply of goods or services can be regarded as ‘closely related’ only where they are also considered to be ancillary to the principal supply.

The purpose and objective of the education exemption is that access to the provision of education, for the benefit of pupils, students and trainees, does not become more expensive due to VAT. Also the principle of fiscal neutrality must be taken into account in the interpretation of the exemptions in the Directive. From the perspective of the end consumer (in this case the third parties seeing the shows and eating in the restaurants), it is irrelevant whether the food is consumed in a normal restaurant or in a training restaurant, or in a normal theatre or a college theatre. In both cases, the consumer is fed/entertained and in both cases he pays money for that consumption.

The AG therefore said that closely related transactions do not include the supply of restaurant and entertainment services by an educational establishment to paying members of the public who are not recipients of the education.

This has been a long running case ans should the CJEU agree with the AG’s opinion, colleges which have submitted claims will have to reverse the claim process and revert to treating such income as taxable.  This would impact on the partial exemption position for current and prior years, and in some cases capital goods scheme adjustments, where relevant.