Reverse charge VAT and charities with non-business actvities

A recent First Tier Tribunal (FTT) decision may be very important for charities and other entities which have both business and non-business activities, and are receiving services from outside the EU in respect of the non-business activities.  As the amounts involved in this case are significant it will almost certainly be appealed, but charities which are receiving services (not just investment management) from outside the EU in respect of their non-business activities (such as non-business research or grant funded projects) should consider their position further and if necessary make protective claims to HMRC.

Wellcome Trust Limited (WTL) makes payments to non-EU overseas investment managers relating to the management of WTL’s investment portfolio. In a previous ECJ case it had been confirmed that the management of charitable investments by WTL i.e. the buying and selling of shares, was a non-business activity. It follows that WTL is not entitled to deduct any VAT it may incur on  management of those investments. Where such fees are charged by a UK investment manager (the place of supply thus being the UK) WTL could not deduct VAT.

However, where services are received from outside the EU, the question arises as to whether the place of supply is outside the UK (in which case no VAT applies) or is within the UK under the reverse charge rules, such that WTL must account for UK VAT on the value of the services to HMRC. Article 43 of the Principal VAT Directive states that ‘a taxable person who also carries out activities or transactions that are not considered to be taxable supplies of goods or services shall be regarded as a taxable person in respect of all services rendered to him’. Article 44 then treats the supply of services made to a taxable person ‘acting as such  ’as being made where the taxable person receiving the service belongs. Article 45 provides that services supplied to any person acting in a private capacity are made where the supplier belongs.

Since 1st January 2010, WTL had been accounting for output tax in the UK in respect of investment management services it purchased from non-EU suppliers. It claimed repayment of that VAT, amounting to c£13m, and HMRC refused the claim.

HMRC considered the place of supply to be the UK under Art. 44, so that WTL was right to account for VAT under the reverse charge provisions, whilst WTL asserted the place of supply to be outside the UK and thus UK VAT under the reverse charge is not due. WTL’s argument was that the words ‘acting as such’ in Art. 44 took the Trust out of the requirement to account for VAT on investment management services supplied to it from outside the EU. It was agreed that WTL was not acting in a private capacity so Article 45 was not relevant.

HMRC considered that all taxable persons must fall into either Art. 44 or Art. 45. As it was agreed WTL was not within Art 45 they argued that WTL must account for reverse charge VAT under Art 44 and that the words “acting as such” did not have any effect.

The FTT disagreed. There was a ‘gap’ between Art 44 and Art 45 and that the words ‘acting as such’ excluded WTL from a requirement to account for VAT under Art 44 to the extent that the services received are  for the purposes of its non-economic business activity. The FTT found that there is nothing in the provisions which requires someone to fall within either Article 44 or 45.

Please contact us for further information if you are receiving any services from outside the EU in relation to non-business activities.


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.

VAT simplification – a tax that is showing its age

On 7 November 2017 the Office of Tax Simplification (OTS) laid in Parliament and published its first report on VAT setting out a range of proposals for simplifying the tax. What was meant to be a simple tax has become highly complex and the OTS report says it has not kept pace with changes in society.

The report contains 23 recommendations for simplifying the tax. Its lead recommendation on the future level and design of the VAT threshold has prompted debate. By enabling many small businesses to stay out of the VAT system the high threshold is a form of simplification, but it costs the UK around £2bn per annum, and evidence suggests that many growing businesses are discouraged from expanding beyond this point. The report looks at options for reducing the current ‘cliff edge’ effect resulting in a ‘bunching’ of businesses just before the VAT threshold, and an equally large drop off in the number of businesses with turnovers just above the threshold.

The 8 core recommendations are:

  • the government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism
  • HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
  • HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed
  • HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS
  • The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations
  • HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications
  • the government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold
  • HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.


Summer Newsletter

Welcome to our Summer news update. Since the last one we don’t seem to have much more clarity on what the post-Brexit business landscape will look like, but we have seen the publication of the European Union (Withdrawal) Bill, which is the most significant piece of constitutional legislation for decades.

We’ve also seen some important cases on property development in relation to pub conversions and student accommodation, and VAT has now become the focus of the upcoming changes to the government’s Making Tax Digital programme.

As always if you have any questions on VAT give us a call on 0208 492 1901 or drop Soc or Linda an email.

Pub and shop conversions

We report on the VAT pitfalls that can occur in converting commercial buildings into residential as illustrated by two recent cases. Get in touch if you are not clear on the rules. Read more

When is student accommodation a dwelling for VAT?

A recent case has highlighted some important VAT differences that contractors and sub-contractors need to be aware of when working on student accommodation. Read more

UK VAT Brexit and EU law- an example

The European Union (Withdrawal) Bill in clause 4(1) aims to convert EU law applicable in the UK the day before the UK leaves the EU into domestic law. This will then be “frozen” and any question as to the meaning of EU-derived law will be determined in the UK Supreme Court by reference to the Court of Justice of the EU (CJEU) case law as it exists on the day we leave the EU.

This is not such a change for us VAT practitioners, because the legislative structure of the UK VAT Act and domestic VAT Regulations are, in principle anyway, meant to reflect EU principles. One of these is that UK VAT laws are as far as possible, meant to be construed in accordance with the Principal VAT Directive (PVD) and the case-law of the Court of Justice of the EU. Where UK law deviates from EU law that principle can be an important benefit for UK taxpayers, who can argue against HMRC for the ‘direct effect’ of the EU provisions, as can be seen from the case of The Learning Centre (Romford) Ltd  in which the tribunal has ruled that HMRC were wrong to force the company to charge VAT on welfare services.

The Bill however provides that the principle of ‘direct effect’ is abolished as from exit day.  From exit day, therefore, it will no longer be possible to base a tax claim on the PVD itself, and the case above, if heard after then, might therefore have had a different outcome.

Making Tax Digital

The Government announced major changes to the timeline for the implementation of Making Tax Digital (MTD). Under the new timetable only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes, though they can volunteer to do so for other taxes. There is still a lot of detail to flesh out. Read more

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.

Durham Cathedral and VAT recovery – implications

Since the ECJ judgment in ‘Sveda’ UAB (C-126/14), we have been waiting for a UK case which applied its principles. Sveda generated a lot of interest because it implied that granting free admission to a building, museum or attraction may not necessarily require a restriction on input tax recovery. The First-Tier Tribunal (FTT) has recently considered Sveda in a case concerning whether VAT incurred on a maintaining a bridge giving access to Durham Cathedral had a direct and immediate link to all the Appellant’s activities, both business and non-business, and was therefore partly recoverable.

The Appellant is representative member of a VAT group which operates the cathedral. Its business activities include operating a café and gift shop on the site, and charging for admission to concerts. There is no charge for access to the Cathedral, and religious activities on the site were agreed by both parties to be non-business. Thus, it was common ground that the Appellant had a mixture of taxable and exempt business activities. The Cathedral, under an agreement between HMRC and the Churches Main Committee about the percentage spilt between religious activities and business activities is entitled to treat 65% of VAT that relates to both business and non-business as recoverable subject to any partial exemption calculation. Under this agreement, the maintenance of the bridge was agreed to be non-business, but following the Sveda judgment the Appellant sought to recover a proportion of the VAT on the basis that the bridge enabled visitors to visit its shop and cafe/restaurant, and attend concerts, in the same way that the recreational path in Sveda enabled people to visit its shop and cafe.

HMRC argued that there was insufficient link to the activities apparently partly on grounds of physical distance. The FTT held that the cost of maintaining and repairing the bridge had a direct and immediate link to all the Appellant’s activities and Sveda was authority for that conclusion.  It was not possible to argue that the bridge had a direct and immediate link only to non-business activity, and therefore the agreed business/non-business split should apply, followed by the taxable/exempt partial exemption calculation.

Why it matters

Sveda was not concerned with apportionment of VAT – the VAT incurred on the project in that case was apparently either recoverable or not. But in the present case, the Appellant appears to have been committed to the business/non-business restriction by agreement with HMRC. Whether, without that agreement, it might have been possible to argue for only a taxable/exempt partial exemption restriction is something that may be teased out in future litigation. However, Sveda was used here to defeat HMRC’s argument that there was no link at all to business activities.

HMRC clarify their position on VAT incurred pre-registration

In Brief 16/2016 HMRC have clarified their position on claims for VAT incurred on assets used by a business prior to VAT registration.  Previously, in some circumstances, HMRC sought to disallow an element of such input tax.

HMRC now accept that VAT incurred on fixed assets purchased within four years of a business’s effective date of registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. This statement now brings the VAT treatment into line with what many VAT advisers always thought the position to be, and in line with the policy that HMRC had applied until recently – although in the Brief HMRC state that there has been no policy change.

The rules are that services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction on VAT recovery if a business is partly exempt. For goods purchased within four years of EDR and are still on hand at the time of EDR, VAT may be recovered in full (again subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.