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VAT exemption: Children’s home bungles process

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Despite operating in an exempt sector, a children’s home was able to register for VAT. But as this is a self-assessed tax it is up to businesses to apply the rules correctly.

22nd Apr 2022
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VAT is a self-assessed tax so businesses and organisations need to apply the VAT rules correctly, as the following case shows.

The appellant, Flying Spur Limited (UKFTT08360), operated an Ofsted-registered children’s home. It was registered for VAT from November 2013 to September 2015, the cessation being instigated by HMRC on the grounds the business was only making exempt supplies.

The appellant appealed in May 2019, stating the desired outcome was to be able to reclaim input tax on all expenditure in the same way as the children’s homes operated by the local authority. The reason given for the long delay in appealing was that they had pursued a route via the Adjudicator and Ombudsman first.

Welfare institutions

The VAT Act 1994, section 3(1) provides that a taxable person is someone who is, or is required to be, VAT registered. The VAT Act 1994 section 4(2) provides that a taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

Schedule 9, Group 7 of The VAT Act 1994 states that supplies of welfare services and connected goods by charities, state-regulated private welfare institutions or agencies, or public bodies are exempt from VAT. Exemption from VAT means that no VAT is charged on the supply and the person making the supply is usually not entitled to reclaim VAT on the costs incurred in making the supply.

A state-regulated private welfare institution can mean a for-profit entity that operates under a state-regulated regime, such as an Ofsted registration, which is required to operate a children’s home (and also educational establishments, nurseries and so on).

VAT registration

It may already be apparent to the reader what the issue was. The business was making wholly exempt supplies on the basis it was i) a children’s home providing welfare services and ii) registered with Ofsted, the government body that regulates the welfare sector.

The business called the HMRC helpline in June 2012 and was referred to the HMRC Notice 701/2. Using the HMRC online system, the business registered for VAT, trade sector as “social care/children’s home” and ticked that this registration was not voluntary, indicating it had taxable turnover over the VAT registration threshold. HMRC confirmed the registration and also confirmed annual accounting/returns.

In April 2015, HMRC warned the taxpayer they would cancel the VAT registration on the basis the only income was exempt welfare services and so was not eligible to be VAT registered. Cancellation then occurred in September 2015.

Reasonable expectation

The business never filed any VAT returns for the whole period of registration. One argument put forward by the business was that there was reasonable expectation that having a social care/children’s home option within the registration process indicates that registration was acceptable. The business also felt it unfair that local authorities could reclaim their input tax (under s33 rules) whereas it could not and finally the deregistration was inequitable.

The business had also indicated it owed £88,000 to HMRC. As this case was to see if a late appeal could be brought, there is no detail on this assessment other than the tribunal noted it had not been presented with any formal assessment. I suspect the business failed to file its annual VAT returns and this would have triggered a surcharge liability assessment. The estimated VAT value was presumably cancelled at the same time as the deregistration on the basis there cannot be any output tax due if HMRC has determined the business to be wholly exempt.

Summary

There is some validity to the argument the HMRC application process allows a business to register for VAT, despite operating in an exempt sector, but even a tiny amount of taxable activity can be sufficient to trigger a VAT registration of a mainly exempt business, albeit subject to partial exemption rules.

The takeaway here is that VAT remains very much a self-assessed tax and it is up to the business to apply the rules to their situation. Whether something is fair makes for a nice discussion but does not change the law and the business owner did not appreciate the nuances that exist within VAT and how even where exemptions exist, they are often narrowly interpreted to a specific set of conditions before being eligible.

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By Paul Crowley
22nd Apr 2022 12:11

I hope this was not following the advice of their accountant.
As in, I hope this was DIY from start to finish

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