Partially exempt?

Partially exempt?

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I have a client with around £170k freely given grant funding from the Arts Council which I believe to be outside the scope of VAT. They also have around £80k income from consultancy work and are therefore hovering close to the VAT registration threshold. Will they only be able to claim 80/250ths of their input tax or all of it?! I've just had a very unhelpful chat with HMRC!

Also, if they were to be partially exempt, could they potentially go in the flat rate scheme anyway due to their taxable supplies being less than £150k?

Thanks.

Replies (10)

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Portia profile image
By Portia Nina Levin
30th Sep 2014 13:57

No!

They are not partially exempt at all. They either have taxable supplies of £80K or £250K. If they register, they can recover all of their VAT.

The question is what is the grant funding for. What if anything are they going to do in exchange for the consideration. The principles are here: http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03315.html

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By JoanneH
30th Sep 2014 14:24

Thanks for this. I'm fairly confident that the grant funding is freely given and not consideration for a supply as there are no conditions attached and the Arts Council don't receive anything directly in return. In which case you're saying that they just have £80k taxable supplies and can recover all input tax as the grant funding is effectively ignored? I just wasn't 100% sure as some of the input tax will relate to the work carried out relating to the Arts Council.

And they could potentially then go into a flat rate scheme? The problem really is that they don't want to be VAT registered due to the impact on their customers, but they're now in a position where they're constantly reviewing the last 12 months income to ensure new work isn't going to take them over the threshold which just seems crazy!

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Portia profile image
By Portia Nina Levin
30th Sep 2014 15:05

I am slightly nervous

I am sure the Arts Council do not just go giving people £170K willy nilly, and then you refer to "work carried out relating to the Arts Council".

Provided that all the client is doing is making taxable supplies (and that it does not have any non-business activities), then yes it can recover all of the input VAT.

If the funding is simply grant funding then, as you say, it is not consideration for a supply, and so would not preclude the use of FRS.

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By JoanneH
30th Sep 2014 15:14

It's not given willy nilly, there's a clear schedule of agreed work but it is all to third parties and follows the example on the hmrc website re the Citizens Advise Bureau which is not deemed to be a supply. Clearly though the company are incurring cost to make the supply to the third party...

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Portia profile image
By Portia Nina Levin
30th Sep 2014 15:23

What example

Can you provide a link to this Citizens' Advice Bureau example?

The "clear schedule of agreed work" now troubles me. In the Wolverhampton Citizens' Advice Bureau case, funding from Wolverhampton City Council was held to be consideration for a supply (made to third parties), because there was a service level agreement.

See: http://www.hmrc.gov.uk/manuals/vatscmanual/vatsc52200.htm "all but the council's supply were outside the scope".

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By shaun king
30th Sep 2014 18:46

Chrikey

I would be very nervous to say you can recover all of the VAT incurred without knowing a lot more. You will have to decide whether there are non business activities which are totally different from exemption and being Partly Exempt. Furthermore, there is no standard method for business non business.

 

You need to get an expert to look at this in greater detail rather than rely on general comments aired in this forum

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By julian.sims
30th Sep 2014 20:26

Business / Non-business activities

Without a lot more detail I cannot comment fully, but it does sound as though some of the input tax is being incurred in respect of non-business activities (probably funded by the grant) and this may not be recoverable.

As @Shaun_King says partial exemption is a very different thing (and has more clear guidance) than the business / non-business activity split.

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By DMGbus
30th Sep 2014 23:01

Citizens Advice Bureau examples

Lifted from HMRC guidance 7 years ago ("V1-3 Consideration and Supply" pages 62/63 of 137):

10.3 Grants
10.3.1 Background

Although a grant is different from a donation, the same questions as for
donations must be considered. Although Local Authorities, Government
departments and the EC make supplies in their own right, they make many
grants to provide financial assistance to a wide variety of schemes.
Like project funding above, conditions may be attached to the grant to make
sure the payment is being used for its intended purpose. However, our view is
that this doesn’t turn the payment into consideration for a supply. The two
Tribunal cases – at paragraphs 10.3.2 and 10.3.3 support this view. You must
also consider the example of Keeping Newcastle Warm in paragraph 9.3.2
where a grant was found to be third party consideration.
10.3.2 Hillingdon Legal Resource Centre (LON/90/12Y)
This trader operated a citizens’ advice centre and received grant funding from
a Local Authority. They argued the payment was consideration for a supply on
the basis that there was a condition that required a detailed report and
accounts be submitted to the Local Authority to show the grant was being
used as originally intended.
The Tribunal agreed with us that the conditions were simply good
housekeeping to ensure the correct use of the payment. Therefore no supply
was made and the grant was outside the scope of VAT.
10.3.3 Wolverhampton Citizens’ Advice Bureau (MAN/96/1145)
This trader provided facilities to give local citizens access to free legal and
other advice. Wolverhampton Borough City Council agreed to provide funds
through an annual payment and the project also received funds from other
organisations such as the City Challenge Project. It accepted all but the
Council’s payment were outside the scope of VAT since the Council required
a written service agreement to be in place - therefore that particular payment
was consideration for a taxable supply.
Customs accepted the full time solicitor making supplies funded by the Legal
Aid Board was a taxable supply, but viewed the funding payments as outside
the scope of VAT. The reason for the appeal was a desire to increase the
amount of taxable income in order to have a better recovery rate on the
renovation of the premises.

The Tribunal considered the case to be indistinguishable from Hillingdon since
there was nothing in the service agreement to support the claim that a supply
was being made. The trader also made an alternative argument that two
supplies were being made – one to the Council of the provision of the facilities
and one of advice given to local citizens. This was based on the arguments in
Redrow Group plc (1999 STC 161), but the Tribunal found that since no
supplies had been made to the Council, there was no similarity between the
cases.

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By The VAT Doctor
30th Sep 2014 23:30

The world according to HMRC

The HMRC partial exemption/recovery branch have recently confirmed that they consider it arguable that any activity that is funded through grants should impact on the recovery of VAT.  They argue that the cost components of a supply, when subsidised, are partially attributable to some non-business activity.  They argue a regular business would not operate in a loss making way.

Remember they argued, and won with the argument, that acquiring shares was a 'financial activity' in the same way as selling shares (BAA) and we have just had their considered views that a holding company within a fully taxable VAT group that incurs input tax maybe cannot reclaim all the VAT (apparently a VAT group only creates a separate single entity sometimes (Skandia).

So, whilst I agree that a grant that subsidises a taxable activity does not impact on the recovery, I am afraid HMRC are less convinced and are likely to question this, especially if the grant is very large.  I am having a very lengthy and complex argument at present with HMRC on the impact of large legacy donations on a charity, where again HMRC argue that this impacts on the recovery.

Isn't VAT great (I am serious)?!

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By JoanneH
01st Oct 2014 16:31

Seems like this is more complex than I thought!
Thanks for all your thoughts everyone. I act as in house accountant for this client and am no VAT expert so it sounds like I need to buy in some help.

The HMRC guidance I was referring to re CAB was within charities notice 701/1 5.10.

No - VAT isn't fun!

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