Churches and temples are some of the most frequent benefiters from the VAT relief that applies to charity annexes to be used for relevant charitable purposes. They often erect new structures, but these are, for convenience or economy, commonly attached and linked to an existing building, rather than being physically separate. But it is far from straightforward to determine when such a development qualifies as an annexe, as distinct from simple extension or enlargement (which are not relieved). To read more, click here
Although the decision of the First tier Tribunal in this case (Loughborough Students Union & Ors v HMRC  UKFTT 357 (TC)) seems to relate to the specific world of students unions, and was decided very much on the facts pertaining to such an establishment, nevertheless some general points for the wider charitable world appear to emerge and can be used with caution.
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Click on the tiles to open the round-up of recent charity VAT cases…
Charity Tax Brass Tacks
By Graham Elliott
I am amazed to note that the last CTBT was issued in February, but it seems only yesterday, so I apologise to those who have grown weary waiting for the next edition. But I comfort myself that a number of more pressing issues have kept you occupied, (and I do not need to mention what these are).
Philanthropic tax incentives
Two important consultations have now been closed, namely Gift Aid Small Donation Scheme (GASDS) and the Gift Aid Donor Benefits. We have now also received the outcome from the responses to the GASDS review and it contains some pretty bright news. In addition a new ‘technical consultation’ has been launched on the use of intermediaries for taking gift aid declarations.
The government’s response can be read here: Government’s Response
Key aspects are:
- Intended removal of all qualifications based on Gift Aid track record
- Inclusion of contactless card payments within GASDS
- Removal of the double allocation of GASDS threshold for community buildings, but easier criteria to meet for the community buildings allowance (including collections outside the building)
- No increase in the £20 limit
This is generally a satisfactory outcome. The basis for the Gift Aid track record was never easy to comprehend and hobbled the scheme from the outset. Its complete removal is a major improvement. ‘Future-proofing’ by including contactless card payments is extremely welcome and shows that the government does not want to be caught flat footed in the face of technical developments. The failure, however, to increase the £20 limit is baffling. Anonymous cash donations need not be small or insignificant. I believe the government is too ‘hung up’ on the ‘small’ word in the title of the relief, and ought to focus on the practical implications of a limit that has little or no function. The fact that charities are, in practice, allowed to accept that all cash donations are within the limit unless there is evidence to the contrary, strongly suggests that HMRC is not unduly concerned about any fundamental dishonesty or abuse arising from payments in excess of £20. On that footing, the rule has no policy benefit.
The changes for community buildings will only affect some charities, and has a mixed impact. But, overall, they are sensible and fair.
Gift Aid Intermediaries
The government has also published a long-awaited consultation document on the mechanism for allowing intermediaries to take and maintain a single Gift Aid Declaration in order to allow electronically collected donations to several charities to be gift aided without multiple declarations needing to be made. This is intended to ensure that gift aid is not lost where the donation is made via (for instance) text. The consultation document is here: Consultation Document
There is little that is surprising here. The ideas have been rehearsed for several months. But, it is good to see that progress towards actual implementation is under way. The single question being asked is whether the draft legislation does actually deliver what is intended. We have until 5 October to tell them our views on that.
Gift Aid donor benefits
This consultation remains open, so the following comments are not an update as such, but reflect my current thinking.
This is a case where opinions are, in my experience, rather more divided.
The intention is to resolve certain complexities in the operation of gift aid where benefits arise ‘in consequence’ of the donation being made. The rule is that a donation can only qualify for gift aid if the value of the benefits is below certain levels. The measurement of these values is often tricky, and certain aspects of the rules (such as the ‘concession’ for ‘split payments’) are difficult.
The consultation document has floated possible solutions such as a more universal and specific relief based on ‘split payments’ or an ‘allowance’ for benefit values to be subtracted from the gift aid value to be claimed by the charity. Another is simply a single ‘percentage’ of allowable benefits, instead of the current grid of four different measures which apply. This could be combined with a more general ‘disregard’ of the token acknowledgements sometimes sent to donors.
These ideas are very welcome, and I hope something will come of them. However, the current system suits many charities ‘just fine’ as it offers a generous value of benefits that may accompany the smaller donations, and thus produces a fairly simple situation in those cases. Hence, the new ideas are generally unfavourable to a range of charities which give smaller scale benefits in consequence of more modest donations, whereas the larger donations to, say, educational or cultural charities, make it preferable for some of the proposals to be adopted. The former kinds of charities may well have made their preference for the status quo widely known. This could give the kind of ‘rationale’ politicians crave – to do nothing – and then say that they have ‘listened to the people’.
In my response I made clear that I thought ‘no change’ was not a good option since the system was recognised as failing. However, even if the more extensive reforms are left on the table, we may find some useful rationalisations (hopefully as regards the treatment of discounts as benefits, for instance) which may then sit within the current general structure.
That said, the mute dog issue, to my mind, was that no recognition was made of the serious VAT problems in such cases. These were ignored because they were immutable owing to dependence on EU law. First, this proves ironic given the events of 23 June and the (eventual) result that these limitations ought not to apply. Second, it simply fails to take account of a relevant factor, without which any reform risks being ineffectual.
Another blind-eye point was the entire concept of a benefit being ‘in consequence’ of a donation. What does this actually mean? You would be surprised how much time I spend trying to unpack that definitional issue with clients. I missed my vocation either as a philosopher or a linguistics professor. It is literally meaningless in some contexts. But, whilst the issue of determining what value of benefits might be, or whether some might be ignored, is being addressed, the precedent issue of understanding the link of a benefit to a donation remains un-debated. This is bound to bounce back on us as a key omission.
VAT on Buildings
We have good news from North of the Border.
This relates to Caithness (very far north indeed) where the rugby football club is a facility of importance for a very wide, and thinly populated, geographic area, and not merely focussed on providing a rugby oriented experience for its users. And, it is constituted as a charity rather than a members’ club or CASC (which might just be a clue about the kind of outfit it is). So, it wanted a new facility and noted the VAT relief for relevant charitable purpose buildings (which is a zero rate on construction services). One ‘plank’ of this relief is where the building may be used as ‘a village hall’ or ‘similarly’ in providing recreation and similar facilities for a local community. The club formed the view that it was going to build a village hall (in this sense).
Now, you will have predicted that HMRC did not agree, that the matter was appealed to the tribunal, and that Caithness Rugby Club came out on top of the scrum. And that is true, but it is worth digressing a bit first, to consider what the bone of contention with ‘village halls’ is.
HMRC has tended to interpret this relief very literally. It’s not that they require the facility to be in a nice little village, (although it is unfortunate that the legislation uses that phraseology rather than that of, say, a ‘community centre’). But what HMRC has tended to think is that the concept requires the building to be ‘run by the community for the community’, and thus by a committee drawn from the community. They prefer it to waddle and quack like a village hall, with all the amenities (but no more) that a village hall tends to have. They sometimes allege that anything either too large or too small, or too focussed on changing rooms, or perhaps lacking a kitchenette, does not really amount to a village hall.
Whilst you can see what HMRC are driving at, the law does not really support them on this. In Caithness’s case, both the First Tier Tribunal, and now the Upper Tribunal, have rejected some of these notions. It is not necessary for there to be broad community control if the reality is that the community does use it as a community centre. The law requires the ‘use’ to be similar to that of a village hall, not that the ‘building’ has to seem similar to one. The law does not require all of the classic aspects of a village hall to be represented, but does require that the uses are consistent with those that can arise in a village hall.
Caithness Rugby Club touched down on these tests. HMRC played a game of two halves, and lost both of them. Let’s hope they pass the ball and put their attentions elsewhere.
Zero rated literature
Many of you will have read about the tribunal decision affecting Friends of the Earth and VAT. The issue concerned the association of a hard copy magazine with money paid by a supporter. The charity argued that the sums paid were ‘for’ the magazine, that this was a zero rated supply (for VAT), and the consequence was a significant claim of VAT on costs. HMRC argued that the magazine is given away and the sums paid were donations and not consideration ‘for’ the magazine, so that no zero rated supply was accordingly made, and the input tax position was not affected by the magazine.
The charity lost the appeal, and this leaves people wondering whether there is a wider principle at play here. They wonder whether this negates the zero rated proportion of a membership subscription, say, which often bolsters VAT recovery levels.
Well, this looks on the surface to be open to a straightforward answer, but one can imagine it becoming complicated if HMRC pushes its luck.
The straightforward answer seems to be that the tribunal was not convinced by the facts put forward by the charity (or, to be more precise, the charity’s facts did not, in the tribunal’s view, make out its argument). It was insufficiently clear to the tribunal that payers were told that they were buying a magazine. It seemed to the tribunal that they were probably making a donation and the magazine was just an extra item. This was because (so the tribunal said) it was unclear that the payers were consistently told about the magazine, and if not, they could not be buying that which was not offered to them.
If that is where it ends, this does not change the usual approach. In order to win a case of this ilk, the tribunal requires proof (balance of probabilities) from the taxpayer, that the facts are as stated. The tribunal did not reject the principle so much as rejecting the version of events.
But there are two worries here. First, this sanguine assessment may have to be revised if HMRC starts to use this as a rallying standard for attacking all charities which bundle a magazine in with a membership package, so we need to keep our ears to the ground on that. Second, it was a pity that, in paragraph 62 of the decision, an old canard about gift aid came from the HMRC advocate. He said that the sum paid could not be consideration for the magazine if it was also treated as a gift (for gift aid). This is plain wrong. Gift Aid legislation refers to a gift, but then defines it in terms which are consistent with consideration for a supply as long as the benefit rules are applied. Fortunately, nothing turned on this, but it is a salutary reminder of how poorly understood (in HMRC) the gift aid rules are.
And this brings us back round to the beginning of this edition of Charity Tax Brass Tacks (so feel free to go around again…. until next time.)
Charity Tax Brass Tacks
If you need to keep abreast of the key practical issues relating to charity tax, this practical, no-nonsense newsletter is for you.
Gift aid declaration
HMRC has just published its revised gift aid declaration wording which supersedes the version which has applied for a number of years. The idea behind the revision was to shorten the message and make it clearer in its impact. The declaration completely removes pointless references to VAT and Council Tax. However, it includes a much stronger message concerning the need for the donor to pay sufficient income tax or capital gains tax in order to match all of the gift aid claims of the charities.
A message to the effect that enough tax must be payable by the donor has always been required on the gift aid declaration, but this has now been supplemented by a direct message to the donor that he is liable to pay any shortfall of tax between what he pays and what the charity claims. This legal obligation has always been present, but most people have been unaware of it including many tax inspectors and charities. This has arguably led to a somewhat casual view of the position by donors, some of whom appear willing to sign gift aid declaration forms whether or not they will pay enough tax. The form, however, still does not say to whom the donor is liable for the tax. The answer is that he is liable to HMRC, and not to the charity.
The new wording is available at this link: https://www.gov.uk/guidance/gift-aid-declarations-claiming-tax-back-on-donations
We are told that the words will become compulsory with effect from 6 April 2016. Up until then the old wording can be used. Any gift aid declarations signed before 6 April 2016 with the old words will continue to have force. However, this will not change the underlying legal position, that the donor is liable for any shortfall.
Charities will want to consider how they position this change. On the one hand they could use it as an opportunity to draw specific attention to the issue in order to save donors from the potential embarrassment of having to pay tax (which they have not earned) to HMRC. On the other hand they may decide that this will have a negative impact on donor morale, and cause even those donors who pay enough tax to be concerned about the ramifications and to refuse to sign a gift aid declaration.
This is particularly difficult when dealing with ‘enduring gift aid declarations’. These are declarations which cover future donations as well as current and past ones. People cannot be sure whether they will pay enough tax in the future. But they are supposed to write to the charity to cancel any declaration which is no longer valid owing to their failure to pay sufficient tax. The difficulty is that most people do not recall the gift aid declarations they have signed. In particular, if they have no reason to claim tax on their own tax return (only relevant to people who pay above the basic rate) it is likely they have no record or recollection of the declarations they have signed. This is a significant potential burden on donors which may cause them to fret about any involvement in gift aid.
VAT victory at European Court
The case of Sveda UAB could well go down in history as one of the most important with regard to the ability to reclaim VAT on expenditure.
The curious thing about this case, which related to a commercial company, was that it involved their spending money on something that was provided free of charge to the public. In their case this was a decorative woodland pathway which led to their shop. The other interesting fact was that 90% of the cost was covered by government grant. The net result was that many potential customers used the decorative pathway without bothering to enter the shop. However, the intention was that certain of those who took this delightful walk would be tempted to buy something at the end of it.
The UK government supported the stance of the national government involved (Lithuania) in saying that no VAT should be reclaimed because the facility was for free of charge use, and not connected with the making of taxable supplies. Alternatively, it said that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.
The Court of Justice rejected both of these arguments. Whilst the path could be used free of charge, the purpose from the company’s standpoint was to generate more traffic towards its shop, and thus generate more taxable sales. This meant that although the cost had a link with the provision of a free facility, it also had a link with the making of taxable supplies. There were no exempt supplies involved, and this was thus sufficient for full VAT recovery. There was no suggestion that the company could only reclaim the percentage of the cost it met, and this supports our general view that grant funding does not, in itself, mean that VAT cannot be claimed (although in certain cases, where an activity is fully grant funded, that would be the result).
What does this mean for charities?
We have to interpret this with caution, since the case concerns a commercial company. Charities usually have purposes that go beyond creating taxable transactions, whereas a commercial company will exist only to sell goods and services. But, in theory charities ought not to be treated fundamentally differently just because they have a duality of purpose. For this reason the case may very well be helpful in creating circumstances where a charity can reclaim VAT where the costs are used for purposes which involve making taxable supplies and involve the free provision of services. However, the case does not tell us how far this principle could be taken. We have to be wary of assuming that it will work where a fundamentally free facility is provided by a charity, in circumstances where a certain amount of taxable spin-off activity arises. This may put disproportionate emphasis on the minor taxable supplies, thus bypassing the fundamental non-business purpose in the costs. But that does not mean that a case which involves a more even-handed mix of taxable and non-business activities would fail to meet this particular test. We have yet to test the boundaries of this new principle, and it will be interesting to see how this develops in the future.