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Partial VAT victory for PPE CIC

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A tax tribunal found that an altruistic Community Interest Company with dreams of income streams was able to recover some of the VAT it had incurred.

14th Jul 2023
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Background

In March 2020, a small group of individuals realised that their 3D printing machines could be used to produce Personal Protective Equipment (PPE) to ease the national Covid shortage. They quickly formed a Community Interest Company (3D Crowd CIC) and by the end of May 2020, several thousand volunteers had agreed to help, with some 200,000 face shields having been donated to the NHS.

Initial expenses

To cover the costs of this endeavour, a crowdfunding account was created which quickly raised over £150,000.

The company 3D Crowd CIC, incurred costs in producing the PPE and applying for CE certification (which was at the time a prerequisite to supplying PPE commercially). The VAT incurred on these expenses was included on a VAT return for the period to August 2020. However, HMRC denied the claim on the grounds that the expenses were not linked to a taxable supply.

3D Crowd CIC appealed HMRC’s assessment. However, it did not do this within the required 30-day window. Despite this, and perhaps due to HMRC openly admitting it sympathised with 3D’s position but felt bound by the legislation, HMRC did not object to the late appeal and gave the first tier tribunal (FTT) permission.

Input tax

Section 24 VAT 1994 defines ‘input tax’ as VAT incurred by a person on “goods or services used or to be used for the purpose of any business carried on or to be carried on by him”. Where there is only partial business use, the VAT in question must be apportioned.

HMRC’s argument was that 3D Crowd CIC never intended to make, and did not in fact make, taxable supplies. The company’s supplies in the period were entirely altruistic, meaning no supplies occurred and any related VAT could not be input tax.

3D Crowd CIC argued that it had always intended to sell the PPE commercially in due course, but it first had to jump through several hoops such as obtaining government approval and the necessary certifications before this was possible. Until then, it had to rely on donations, but the long-term aim was to charge enough to cover costs.

Its choice of a CIC supported this, as if it had intended to remain altruistic it would have formed a charity, and if it intended to aim for profits it would have chosen a limited company.

Following consideration of the Fisher tests, the FTT focussed on four main points.

Intended business activity

With regard to the company’s intentions, the FTT determined that it had fully intended to enter into contracts in return for payment in the future, of a level that would allow it to sustain its activities long-term. The planned income would be of a commercial amount, albeit broadly in line with costs, and so represented an economic activity.

Linked VAT

Next to be considered was whether the VAT paid could be linked to the intended supplies. 3D Crowd CIC had argued that while its expenses did not directly lead to onward supplies, they did lay the groundwork for them.

Further, accreditation was only required if 3D Crowd CIC intended to generate income; had it planned purely to donate the PPE then this would have been a completely unnecessary expense.

The FTT agreed that the lack of a direct link between expense and onward supply was not an issue.

Intentions

3D Crowd CIC had not, in fact, made any of the planned taxable supplies, as the accreditation process had been long and other suppliers were in place before the company was ready to make sales.

However, the FTT agreed that 3D Crowd CIC had intended to make taxable supplies and, in the clear absence of fraudulent activity, this was sufficient to make them an intending trader, despite the lack of actual sales.

100% donations

Finally, did it matter that 3D Crowd CIC had given away every item of PPE? 3D Crowd CIC argued that these were ‘business gifts’ in hopes of future sales, but the FTT disagreed, largely due to the huge volumes involved.

It was further noted that there was a point where 3D Crowd CIC knew it was producing PPE it would be unable to sell due to accreditation requirements (and seemingly also some misunderstandings about what it could and could not sell at various points).

The FTT therefore found that there were two purposes to the company’s activities:

  1. reaching a point where taxable sales were possible, but also;
  2. contributing to the fight against Covid via donated items.

The VAT incurred on overheads and manufacturing costs was therefore found to be only partially input tax and needed apportioning. The VAT on the accreditation costs was however found to be incurred 100% for the intended trade and was therefore entirely input tax.

With that caveat, the appeal was allowed.

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