VAT exemptions and non-profits – tough goingby
Les Howard completes his series explaining how VAT exemptions apply to non-profit organisation with a tour of three more exempt groups, where the non-profit wording can prove tricky: education, sports and cultural services.
Exemption for supplies of education is restricted to supplies made by an ‘eligible body.’ This includes schools, universities and other statutory bodies. The provision most relied upon by private providers is found in Note 1(e):
a body which—
(i) is precluded from distributing and does not distribute any profit it makes; and
(ii) applies any profits made from supplies of a description within this Group to the continuance or improvement of such supplies.
The first limb of this provision is common to non-profits. It is the second limb that causes some trouble. The organisation is required to ringfence its surplus (if any) of education activities such that those surpluses are only used to continue and improve those supplies. HMRC guidance in VATEDU39700 is helpful in setting out HMRC’s approach to this question.
The ECJ has held that where an organisation systematically aims to make a surplus which it then uses for the improvement of its services does not preclude it from being an ‘eligible body’ within this definition. (This was the conclusion in Kennemer Golf & Country Club v Staatssecretaris van Financiën  STC 502. The case addressed the relevant legislation for sports clubs int the Netherlands, but the wording is very similar to that in Groups 6 and 10).
The definition of ‘eligible body’ in Group 10 follows that of Group 6. However, it adds a further provision, that the organisation ‘is not subject to commercial influence.’
This phrase was included, I understand, after the Tribunal case in Chobham Golf Club. In this case, the land was owned by a privately-owned company to whom the Club paid rent. Although the Tribunal found that the arrangement was not abusive, HMRC evidently took the view that this was not what the legislation meant. So the extra condition was added into the legislation concerning ‘commercial influence.’ The ‘commercial influence’ rules are explained in Notice 701/45, chapter 4.
The definition of ‘eligible body’ in Group 13 also follows that of Group 6. But there is a further, and different, extra clause which applies. The exact wording of the legislation (Note 2(c)) is:
is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities.
This wording is explained in Notice 701/47, chapter 4. The ECJ also looked at it in the case of Zoological Society of London  STC 521. At the original Tax Tribunal hearing in June 1998, HMRC seemed to argue that staff should all be unpaid, otherwise the exemption would not apply. The taxpayer and the ECJ took a different position, that such an organisation could not operate without some paid staff.
The issue is not easy but trustees must ensure that they are satisfied that the condition above is satisfied, in order to bring the supplies within the exemption.
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Hi, I am a VAT Consultant, part of the team at vatadvice.org We are based in Cambridgeshire. We work largely with charities but also advise a range of commercial organisations.
I have over 30 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.