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Is Vat Charitable?

3rd May 2016
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Vaughn Chown looks at two recent VAT cases that have implications for UK organisations.

Judge: ‘It cannot be impossible to relieve charities of an unintended tax burden…’

Wakefield College have been backwards and forwards to the First Tier Tribunal, and ended up with an unsuccessful visit to the Upper Tribunal in their attempt to persuade the Judge that zero rating should apply to the supply to it of construction services on the basis it is a charity.

It cannot be right that a charity has to expend valuable resource from limited funds fighting a case where it is debatable whether VAT should have been levied in the first place. A common sense approach would suggest that VAT should not have been levied but I must admit to never having used the words common sense and VAT in the same sentence before!

The Judge was scathing in his summing up, stating that although either side were rightly trying to either minimise their VAT costs or protect the Revenue, he expressed his disquiet that the appeal should even have come before him at all, due to the charitable status of the appellant and that it should not be impossible to relieve charities of an unintended tax burden.

This case centres on the fact that the charity incurred building works that HMRC considered were subject to standard rated VAT owing to the charity being in business.

It was common ground that the college was a charity and that the bulk of its income was from public funds. Due to these funds not meeting all their costs, the charity needed to seek other income sources.

This placed the charity in the uncertain position, upon which the Judge commented that if the income could be, by luck or by judgement, kept below an arbitrary amount it can escape the burden of VAT on the charity’s receipt of construction services. But if it could not, even by a trivial amount, the construction services became chargeable to irrecoverable VAT. The Judge considered it unlikely that Parliament meant such a capricious system and could not have conceived that charities would have, as in this case, been before the First-tier Tribunal twice and now at the Upper Tier.

The Honourable Mr Justice Barling and Judge Colin Bishopp stated that: “Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse.”

Can we take anything from the case? HMRC and the courts consider that to reclaim input tax there must be a direct and immediate link from the expense to the supply made. Paragraph 48 of the case decision states “there must come a point at which the disparity between the value of the payments and the cost of the supply becomes so great that the direct link between supply and consideration…is lost.” Herein lies the crux of the matter and a position that one would have thought could have been resolved before it got to the Tribunal. Where business supplies are minimal a common sense approach should prevail – oops, there are those words again!

Given the criticism and harsh words from the Judge, let’s see whether HMRC make representation to change what is an entirely inequitable position for charities that are only in existence due to their public funding.

Taxable supply or compensation?

This is a thorny issue if ever there was one! In the joined cases of Air France-KLM and Hop! Brit Air SAS (CJEU C250/14 and C289/14), the European Court has decided that the price of French airline tickets paid by passengers constituted consideration for the transport service offered by the airline company, and that price was subject to French VAT that needed to be accounted for and paid.

The airlines therefore had to pay VAT on the amounts paid for tickets that passengers did not use (airline tickets in France are subject to VAT).

With careful planning in the UK, however, similar amounts can be considered as compensation in nature and outside the scope of VAT. This is particularly important for hotels and others in the UK who receive deposits for supplies to be made.

• Vaughn Chown is VAT partner at Gabelle Tax. You can email him at [email protected]

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.

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