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.


ADR agreements with HMRC do not always give taxpayers certainty

ADR agreements do not always give taxpayers certainty

The First Tier Tribunal decision in the case of The Serpentine Trust Ltd (‘TST’)  illustrates how an Alternative Dispute Resolution (ADR) agreement with HMRC may not necessarily give certainty to a taxpayer even though both parties have agreed its terms.

TST ran five supporter schemes under which supporters made payments in return for a range of benefits. During a VAT inspection, HMRC raised various points and identified that in respect of four of the schemes, TST was not accounting for VAT, but was treating the payments made by the supporters as donations. The fifth scheme (the Council Scheme) was subject to a ruling from HMRC in 2003 which allowed that if TST identified a value for the benefits, on which it accounted for VAT, and a value for a donation, the donation element was treated as outside the scope of VAT.

A series of ADR meetings were held to seek agreement on the points in dispute. All points were agreed, including the treatment of supporter schemes with effect from 1 April 2013.The agreement between HMRC and TST in relation to supported schemes stated “From 1/4/13 where the value of the ‘benefits’ package for supporter schemes is identified and this is clearly stated (both in the application forms and on the website), this will be treated as the consideration. Any sums paid above the price charged for the benefits package is to be treated as a donation.”

For periods before 1 April 2013, HMRC assessed TST for VAT on total supporter scheme income and TST appealed to the First Tier Tribunal (‘FTT’). The FTT upheld the assessment finding that TST was making a single standard rated supply of the right to take part in various events organised by TST in return for the total payment. However, in making her decision, the Judge expressed surprise that a mere change of wording in the Taxpayer’s literature was sufficient to mean that after 1 April 2013 the VAT liability was confined only to the portion of the income which corresponded to the benefits supplied to Scheme and commented that:

“The Trust is of course entitled to rely on the clearances it has been given by HMRC, even when they are, as they appear to be in this case, wrong in law. I express the view that it is inappropriate for HMRC to give private rulings inconsistent with their published position.”

The reference to HMRC’s published position was a reference Notice 701/1 in which HMRC state that it must be clear to supporters that the benefits of membership can be purchased by paying only the minimum payment (benefit value).

Three months after the first FTT decision, HMRC withdrew the Council Scheme ruling allowing TST to account for VAT only on the benefits value, and seven months after the decision, HMRC wrote to TST advising that TST may have ‘misunderstood’ the ADR agreement. Following a period of further correspondence, HMRC issued an assessment to TST in relation to its treatment of supporter schemes from 1 April 2013, stating that VAT should be charged on all payments received from members of the Supporter Schemes and not just the amount deemed to cover the value of the benefits. TST therefore appealed again to the FTT again on the basis that it had a written agreement with HMRC. The main questions to be decided by the FTT were:

  • whether the FTT had jurisdiction to rule on the issue;
  • whether TST or HMRC had correctly interpreted the Supporter schemes paragraph in the ADR meeting note;
  • whether HMRC and TST had a contract and, if so, whether there was legal agreement between the parties, or an omission of a central term so as to void the contract;
  • if there had been a contract, whether HMRC had made a unilateral mistake; and
  • if there was no mistake, whether HMRC had the power to make such a contract.

It was agreed that the FTT had jurisdiction to hear the appeal, and therefore had to decide the issues set out above. The FTT found that the terms of the ADR agreement for the treatment of supporter schemes from 1 April 2013 was unambiguous and therefore TST was bound to account for VAT only on the value ascribed to the benefits.  It rejected HMRC’s arguments and found that the agreement constituted a binding contract intended to create a legal relationship between the parties. There was no unilateral mistake by HMRC in consenting to the agreement and so the contract was not void.

In considering the evidence and the facts, the FTT found that:

  1. HMRC had adopted the approach in the Council Scheme ruling in relation to at least some other charities;
  2. HMRC withdrew those rulings prospectively after the first Serpentine tribunal case was published; and
  3. TST’s adviser genuinely believed that HMRC operated a practice of requiring only that the benefits provided to members of supporter schemes be quantified and communicated to those members and did not require those benefits to be made separately available for purchase. The FTT also determined that the evidence of the HMRC mediator should be set aside as being ‘unreliable’.

However, and unfortunately for TST, on the last question the FTT found that what HMRC had agreed was wrong as a matter of law. For VAT to apply only to the benefit value, it must be clear to supporters that they can purchase the benefits separately.  HMRC could not depart from applying the correct taxing provisions without direction from parliament or an extra statutory concession and the ADR agreement was therefore ultra vires.

This was a frustrating outcome for TST, especially as it was clear that HMRC had been applying the terms agreed at ADR to the Council Scheme and to other taxpayers for several years. The only remedy for TST now would be to take judicial review proceedings against HMRC, on the basis that it had a legitimate expectation that it could rely on the ADR agreement. JR proceedings are however expensive, and it is notoriously difficult to obtain a favourable ruling against the state.

The case shows that the ADR process is not a failsafe and raises the question of how much certainty a ruling from HMRC gives to taxpayers. It is concerning that the evidence of the HMRC mediator was set aside as unreliable, and therefore one of the points to take forward when considering an ADR process is the use of an independent mediator with the necessary VAT expertise.

Any organisations accounting for VAT on a similar basis to the TST ADR agreement, should review the position and take action accordingly.

Socrates Socratous of SOC VAT Consultants gave evidence on behalf of TST.

The Wakefield College case and ‘non-business’ for VAT

The Court of appeal has released its judgment in the case of Wakefield College v HMRC [2018] EWCA Civ 952.

This case has implications for all charities because it is about the VAT relief (a zero rate) applicable to the construction of new buildings for charities. The relief applies where a building is used for non-business purposes – “relevant charitable purpose”. Where any business use would be exempt, (for example education provided by charities), the charity will prefer its activities to be regarded as non-business so that it is not charged VAT which it cannot claim.

The Court of Appeal decision in Longridge on the Thames [2016] EWCA Civ 930, in September 2016 appeared to establish that there is limited scope for ‘non-business’ charitable activity for the purposes of the ‘relevant charitable purpose’ test.  Longbridge claimed the key test was whether the charity’s ‘predominant concern’ was the making of supplies for a consideration. It argued that its policy of subsidised pricing and use of volunteers showed that it was predominantly concerned with providing access to sporting activity and not with ‘making supplies for a consideration’. But Longridge lost in the Court of Appeal – the court thought that neither predominant concern nor the quantum of the charges were relevant. At that time, however, the Wakefield case was still running.

In Wakefield HMRC denied VAT relief for the new college building on the basis that more than 5% of the use would be ‘business’.  The issue was whether the provision of further education courses to students living locally who paid a fixed, but publicly subsidised fee, amounted to the carrying on of a business activity.

The College argued the subsidised courses were not “business” based on the CJEU decision of Finland, in which it was decided that means-tested payments, made by a minority of service users for legal advice, was not consideration because it relied on determining the means of the payer not the value of the service, and that was not a clear enough ‘link’ for the payment to be made ‘for’ the services.  This line of argument was later followed in the CJEU in Gemeente Borsele, where a municipal body charged parents for school transport, but only those travelling over a certain distance, and only to the extent families could pay, meaning it received only 3% of the actual cost of the service. The College argued that it, too, only charged a small percentage, and had kept fees low because of the economic circumstances of the local residents. It thus argued that despite charges being fixed for all qualifying applicants, this was a form of means testing, as in Finland and Gemeente Borsele, and it was therefore not receiving ‘consideration’ for these courses and thus not in ‘business’ to that extent.


The Court of Appeal found that the College was carrying on an economic activity and thus zero rating could not apply. Briefly this was because its activities were not comparable to those in Finland and Bosele. Its sole activity is the provision of educational courses, whereas the transport in Borsele and the legal services in Finland were very much ancillary to their principal activities as public bodies. The provision of courses to students paying subsidised fees was a significant, albeit minority, part of the College’s total operations and the fees paid by such students were significant in amount, both in value and in relation to the cost of providing the relevant courses. Furthermore, the fees paid by the students were calculated by reference to the cost of providing the courses, and not to the means of the individual students.

Why it matters

HMRC suggested that about 50 other cases, involving approximately £120m of VAT, would be affected by this decision. The Court made some interesting comments, derived from reading the French version of the Finland and Borsele cases, and said whether there is a supply for consideration and whether that supply constitutes an economic activity are two separate questions. A supply ‘for consideration’ is  necessary, but is not sufficient in itself for an actvity to be an ‘economic activity’. The first condition requires  the payment to be made under a legal relationship with reciprocal performance between the supplier and the recipient, i.e. the ‘direct link’. The economic activity condition means also showing that the supply is made ‘for the purpose of ‘obtaining an income. But ultimately the Court decided that here the “direct link” test was met anyway, because the fees were not means-tested.

Thus it seems likely that the position after Longridge remains, i.e. that the only use that is not to be regarded as ‘business’ is in cases where there is no ‘remuneration’ (for which read payment or ‘consideration’). Unfortunately HMRC may now be likely to argue that, even in very small operations where below-cost payment is received, (such as in the cases of St Pauls and Yarborough nurseries) construction services may not qualify for relief.



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.