Charity Tax Brass Tacks
By Graham Elliott
Welcome to the second edition of Charity Tax Brass Tacks. This newsletter is intended as an easy way to keep abreast of some of the more important developments in the charity tax arena. Most of the solid news (as opposed to rumour) over the last few months is related to VAT. Both gift aid, and the Gift Aid Small Donations Scheme (GASDS) are currently subject to various reviews by HMRC which are trundling along, and will probably produce some news in a few months’ time. Some technical issues concerning the ability of a charity subsidiary to eliminate tax by donations to the parent charity continue to provide theoretical challenges which have not been resolved, and which may end up being ignored by the authorities. It is therefore left to VAT to provide the points of greatest immediate interest.
Wakefield College and ‘non-business’
If it is ever possible to observe reliable trends in an area of tax policy, one such could be the slow retreat charities have suffered in relation to defining ‘non-business’ activities. To remind you, these are of greatest importance where a charity wishes to construct a completely new building or annex, the costs of which can be zero rated rather than standard rated where its use is for entirely non-business purposes. This has caused many charities to claim that their activities are not in the course of business – not to save VAT on income (their supplies would be exempt) but purely to save VAT on their costs. The same applies, though less dramatically, to their fuel and power costs.
A recent ‘outlier’ in this area was the case of Longridge on Thames, which is a provider of children’s water sports tuition. This succeeded in the tribunal, and on appeal to the upper tribunal, in asserting that its activities were not a business despite making regular charges at reasonably substantial levels. Whilst this can be explained in various ways, it does not appear to be ‘on trend’. Indeed, HMRC is in the process of appealing this to the Court of Appeal, in what may seem to be an audacious move, given that they have not been successful in either of the lower tribunals. All HMRC has to achieve, however, is to convince the Court of Appeal that the matter is far from definite, and that a reference should be made to the Court of Justice of the European Union. Assuming, of course, that we vote to remain in the EU, the UK courts are subject to the oversight of the CJEU, and the Court of Appeal has a track record of agreeing to refer difficult questions to it. The outcome of this process is therefore well and truly in the balance.
What has this to do with Wakefield College? Wakefield is a much more recent decision which supports the trend I am referring to, leaving Longridge more or less on its own. Wakefield appeared to have been successful because the First-tier Tribunal accepted that its activities (with regard to a particular new building) were solely non-business. This in turn was based upon the rather strange decision by the CJEU in the case of Finland to the effect that means tested charges are not ‘consideration’ for the service, as the price was not linked to the value of the service itself. The first tribunal noticed that Wakefield’s charges appeared to be linked to ability to pay, and followed suit by saying that they were not consideration for any supply. If they were not consideration, then it could not be a business transaction.
But this appears to have been a simple error of fact on the part of the tribunal, since the Upper Tribunal said that only certain of the courses were means tested in a genuine fashion. A large chunk of the courses were priced very competitively specifically to allow access to those of slender means. But this was not the same as means testing, which meant that the Finland precedent did not apply. Wakefield was extremely unlucky because the vast majority of their courses are either free of charge or means tested. Only a small minority of students pay the very low fees discussed above. But for the construction work to be zero rated, its use must be ‘solely’ for qualifying purposes. ‘Solely’ can equate to 95% (HMRC tells us), but this leaves almost no room for manoeuvre, and Wakefield College is unlucky enough to have a slightly lower percentage than that. Hence my view that Wakefield College was unlucky, particularly set alongside Longridge. An appeal by them would certainly be helpful, though one cannot be optimistic.
Sticking with the educational theme, I was very disappointed in the Court of Appeal decision relating to the now established precedent of Brockenhurst College. This is one of those cases where one’s initial reaction was incredulity, giving way to almost complete acceptance. The college provides exempt education, particularly to catering students. It also made charges in a catering establishment for meals provided by those students. But these charges are much lower than normal, and those who consumed the service also had to give feedback on the students’ performance. The college had exempted these charges as being ‘ancillary to education’. My initial reaction was to think this could not be a supply to the student as the charge was made to the consumer. But then it became obvious, thinking the argument through, that there was nothing in the legislation which said specifically that the supply had to be to the student. As long as it was ancillary to education, it could be exempt.
That is what the First Tribunal said, and the Upper Tribunal supported this view. But the Court of Appeal has now decided to refer the question to the CJEU. Oddly (in my view at least) Brockenhurst College actually supported this referral. To be frank, I think that they have signed up to their own defeat. I would love to be proved wrong. I think that the CJEU is going to struggle with the idea that those who consume a meal, whatever may be their underlying motive, can be treated as purely ancillary to education. After all, they do (or should) get a meal from it, which serves a particular purpose to them other than the education of the students. Of course, these comments are no more than a rehearsal of my original incredulity. The difficulty is that a court could also be incredulous, and the past quality of the decisions of the CJEU give scant confidence that a full and worthwhile analysis of all of the arguments will be undertaken. This is the Court of instant reactions and almost no explanatory argument.
On a happier note, the CJEU decided in Larentia + Minerva that the German government had no right to exclude partnerships from VAT group registrations, and this has led HMRC to commence a review of the criteria for group registration, including potentially broadening it out from the current restriction to corporate bodies.
How would this benefit charities? The only obvious one is that unincorporated associations might be included in the category of those that can group register with the trading subsidiary. On a practical level, HMRC appears to accept group registration applications between unincorporated charities and their trading subsidiaries, as long as the Board of Trustees is itself an incorporated body. This is increasingly the case, seemingly to protect individual trustees from personal liability for any financial difficulties the charity may encounter. And this, of course, goes to the nub of the issue about VAT group registration. It comes with the burden of ‘joint and several liability’. Where one of the parties is an unlimited structure, this can cause a headache. Technically speaking, each individual trustee is then jointly and severally liable for all of the VAT debts of the trading subsidiary. If HMRC is minded to introduce VAT grouping in the circumstances, it would be helpful if they would confirm a policy decision not to seek access to individual trustees’ personal assets in innocent cases where a VAT liability cannot be paid by the limited subsidiary company.
What about the staff?
Charities have been extremely interested in the outcome of the latest ‘temporary worker’ VAT litigation. To remind you, up until 2009 it was possible to use a bureau to hire temporary workers without VAT on the temporary workers wage element (unless the temps themselves were VAT registered), thereby replicating the tax liability of true employees fairly closely. HMRC’s policy changed by reference to regulations which required temporary workers to be given employee style rights by the employment bureau. A previous case, that of Reed Employment, appeared to throw doubt on whether HMRC’s new policy was correct. This litigation only covered old contracts, so what we needed was a new case relating to newer contracts which might force HMRC to change policy.
Enter, stage left, Adecco. It created a test case which went to the tribunal. Unfortunately, the tribunal explicitly disapproved of the earlier Reed decision, and, on the basis of the contracts as they stood in the case, decided that the employment bureau was in fact supplying the services of the temp workers. In other words, it was not intermediating in an agency capacity, but was buying and selling. That was fatal to the analysis that there should be no VAT on the temp worker’s salary.
One can only hope that this is appealed, as the sums involved are significant. However, the difficulty may be that the introduction of the regulations which had made HMRC change their view could have caused contracts to be tweaked to come into line with the very regulations themselves. If the contract conveys a ‘servant/master’ relationship between the worker and the bureau, then that is almost an insurmountable hurdle. The mere fact the contract changed by reference to regulations does not override the basic premise that the VAT analysis must follow what the contracts say.
Those who are interested will have to watch this space.
Those who work in the care sector are familiar with the fact that a zero rate applies to the new construction of institutional residential properties such as care homes.
One catch with this is that the building or buildings has to create a complete new institution. It is insufficient to build a new building that will simply slot into an existing institution. That would be standard rated whether or not the building was structurally separate.
A different question which sometimes arises is whether it is possible to zero rate construction where two or more buildings are built at the same time to form the institution (yes it is), but where one or more of these is a ‘member’ (so to speak) of that institution but will also do service for other buildings or existing institutions. Does the unit have to be entirely dedicated to the new institution in order to be zero rated? Would any use with another institution mean that it is not to be regarded as part of the new one?
The legislation frankly does not tell us, because it was drafted without considering the point. But the tribunal decision in TGH (Commercial) Ltd. (TC04851) is encouraging in this respect. The tribunal thinks that a separate building that is needed by the new home which it will serve (and alongside which it is constructed) qualifies to be part of that home, and that is all that is needed. The fact that it can be useful for other purposes or to other institutions need not cause it to lose its quality as being part of the new institution.
Good news as this may be, beware an appeal from HMRC, and always analyse the detail. HMRC is unlikely to agree to general application, and will probably plead that this case was ‘decided on its own facts’.
Gift Aid Small Donation Scheme
For those who use this relief, and for those who do not because its rules are too cumbersome to be worth the bother, please look at the ‘call for evidence’ issued by HMRC to inform it as to possible changes. The deadline to respond is 2 March. HMRC tells us that most responders to date have been churches. Whilst that is fine, it would be better to get a wider range of information or insufficient improvement will result. Here is the link: https://www.gov.uk/government/consultations/gift-aid-small-donations-scheme-a-call-for-evidence Please make a submission!