A subject that never seems to go away is the issue of how much VAT can be claimed on charity purchases. Quite apart from the difficulty of determining whether, say, an activity is business or not, or exempt rather than zero rated, which can drastically affect the level of recovery, there is the issue of the approach to apportionment of the related costs… 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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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.)
Round up of the recent news on VAT
By Graham Elliott CTA (Fellow) MBA
At this Christmas time, instead of sending a card, I send you these thoughts from the world of VAT. But fear not! I bring no tidings of zero rated food to choose for a tax-efficient Christmas (though mince pies would be a candidate….). The theme of this Yuletide edition is: don’t assume that a court decision which supports your viewpoint means you are home and dry. Not for the first time we have found that previous decisions have been overturned, (and the decision that did the overturning can very easily be overturned in its own turn).
The Temps they are a-changing….
In the tale of staff supplies past, we recall that Old Marley was able to hire temp staff through a bureau and pay VAT solely on the ‘mark-up’, and not on the element paid to the staff. VAT was added to the temp wage element in 2009 ostensibly as a late reaction to changes in regulations affecting employment businesses which themselves occurred as far back as 2003. This created a significant hurdle to employing temps since the tax differential with ‘proper’ employees made temps all but unaffordable except for fully taxable businesses. This hit to ‘neutrality’ was evidence of poor policy thinking on the part of government, but they did not seem to care about that.
In 2013 we saw a light at the end of the tunnel when a tribunal held that Reed Employment did not supply staff in this case but acted as a mere agent, irrespective of the regulatory position (but only as long as the contracts were written in a manner which supported that). We all expected HMRC to appeal this adverse decision, but they decided not to (not to be confused with cases where they simply miss the deadline to appeal…).
Did this mean that they accepted the decision? No; it probably meant that they wanted to keep their powder dry for another case where the facts were more propitious for them. This reveals a significant ‘fault line’ in our legal system. Courts of first instance do not set binding precedent, but any court of appeal (Upper Tribunal upwards) does set binding precedent. So HMRC can avoid setting binding precedent simply by not appealing. They concede the immediate case (and the tax in question) but live to fight another day. And that’s what happened here.
Another case, Adecco, came forward recently on similar facts, and the argument started again. HMRC said that the previous Reed case had been wrongly decided and should be overturned (in effect). The tribunal pointed out that it was very regrettable that HMRC had not chosen to appeal a decision with which they clearly disagreed. But that is all the tribunal could say, since that is HMRC’s right under the rules. And this aspect could not influence the tribunal’s conclusion in itself, which had to be reached on the merits of the legal argument alone. Unfortunately for all of us, this second tribunal flatly disagreed with the earlier one. The facts were not identical (in my view), and the tribunal could have said that the different outcome arose mainly from any small differences there were. But it decided not to be as gentlemanly as that, and simply declared the earlier tribunal to be wrong. It took ‘comfort’ from the fact that the tax payer was highly likely to appeal its decision (ignoring the fact that HMRC had decided not to appeal in the case of the earlier decision), so a more capable judge would be able to arbitrate between the two views.
Unless an appeal goes ahead, we seem to be stuck with a VAT imposition on the whole of a temp’s costs when incurred via a bureau that pays its wages. We can only hope for an appeal. That said, the outcome of the appeal, on the facts of the later case, is far from predictable.
Parking for Christmas?
What can be worse than the dash for the parking space at Christmas shopping? There are never enough, and the sole remaining space is in an inaccessible area hedged in by obese vehicles of the kind that appear to have eaten too much stilton and cake. So you will be pleased to hear that the car park operators are not going to have as Merry a Christmas as they might have had, owing to the tribunal decision in the case of National Car Parks Limited, released in the middle of December.
This deals with that other unpopular feature of many car parks, namely that you not only have to predict the amount of time you need, but also have to insert the exact amount, or else make a deliberate overpayment, since no change is ever given. What happens (in VAT terms) to the element that exceeds the minimum amount needed for the time you have selected? Is it outside the scope of VAT, or part of the price, and thus subject to VAT? Well, we surely have known the answer to that since the Kings Lynn car park decision of a few years back, haven’t we? This was that the extra payment is outside the scope of VAT and entirely a windfall to the provider. On the strength of this, NCP made a claim of half a million pounds for a four year period (meaning, dear reader, that we have in effect made overpayments in that period of £3m… or more, because the period in question had elements in the days of a lower VAT rate, but let’s not get hung up on details).
What could possibly go wrong? Well, the problem was that the Kings Lynn decision was only ‘first tier’ so, as with the temps case mentioned above, it was not binding on a later tribunal. And, yes, HMRC had decided to take a new case having not appealed the earlier one. And the result? You guessed it, the new tribunal said that the overpayments were subject to VAT after all.
Now, in this case the judge did indeed adopt a more gentlemanly approach, because she did not say she disagreed with the earlier decision, but that there was a relevant factual difference, to which I will come in a moment. That said, she was clearly unconvinced about the impact of that difference on the decision of the earlier tribunal, and I infer that she would have reached a different conclusion in the Kjngs Lynn example had she been deciding it. But she was content to say that the difference was sufficient to justify her different conclusion, and to give NCP a nasty surprise.
What was the difference? Merely that the Kings Lynn car park was run by a local authority which was technically restricted as to the prices it was allowed to charge, whereas NCP had no such restriction. Quite how this impacts on the obvious fact that the local authority had demanded exact coins or that any overpayment would be accepted and no change given, is completely beyond me. If there was a rule limiting the price they could charge, then they were breaking that rule. If there was no breach of the rule, then the overcharging was just the same as with NCP’s car parks. There is no logical reason why NCP should be treated differently. They can definitely feel that the Grinch has stolen their Christmas!
On the other hand, I find it hard to resist the logic of the latest decision. The customer was offered parking at a minimum sum of coin values which, if unable to pay that exact sum, could be purchased at a higher sum of coin values. So everything they paid was consideration, and none was a ‘gift’, nor a tax or levy, so it must therefore be consideration.
Straight down the Middle….?
Your New Year Day round of golf will be enhanced by good festive news for members clubs (note: not proprietary clubs) concerning the VAT they can claim from HMRC on the past over-taxing of what are generally called ‘green fees’.
The main issue on green fees, namely that a non-profit club can exempt them, was decided a while back. But the most recent case involving a number of clubs focussed on whether ‘unjust enrichment’ prevented such clubs receiving their claims for incorrectly paid VAT from the days when HMRC asserted that the supplies were taxable. HMRC can use this as a defence against paying out the VAT if they can show that the economic burden of the VAT charge fell on the customer rather than the club (unless the club suffered lost sales from the necessary higher prices).
Now, a moment’s thought on this suffices to take the general view that the club must surely have been the ‘loser’ from accounting for VAT as the price clearly would not have been reduced had they been able to exempt the supply from VAT all along. But the boffins have more sophisticated ways of appraising the position than this ‘fag packet’ thought process would suggest, and HMRC decided to spend small fortunes arguing that casual green fee golfers had borne the economic burden of the VAT charge.
They squared up to some members golf clubs in a tribunal hearing (such as the Berkshire). What was the outcome? It was that 90% of the burden had indeed fallen on the clubs (and pardon me if I do not try to explain why 10% did not, since I do not have a PHD in economics). So, common sense prevails again….
Enjoy your New Year day round of golf (but remember, as a player, you were never disadvantaged by the incorrect tax impost anyway, so cannot be getting a benefit from the supply being exempt).
And while you are playing, spare a thought for the owners of proprietary clubs, whose supplies are all taxable, because they make and distribute profit, whereas a members club retains all surpluses in the club, and is therefore exempt. What Christmas cheer do these owners have? The answer is: none. They attempted to give themselves a Christmas present in the form of a result in the case of Abbotsley Golf Club et al heard by the first tier tribunal and decided a fortnight prior to Christmas (just days after the above case was decided in favour of the members clubs).
This intriguing case proceeded by the somewhat circuitous route of challenging the exemption applicable to affiliation fees that had to be paid to the county association and thence (in part) to England Golf (the national governing body). Oddly, these bodies, the VAT treatment of whose fees was under discussion, were not even involved in the proceedings. What could be the point of it? Well, it seems it was a ‘warm up act’ (to quote the judge verbatim) for an attempt to challenge the entire basis of the sports exemption for non-profit making bodies, via a requested reference to the Court of Justice of the EU, on the basis of unfair discrimination against proprietary operations. But there is nothing more to report of this potential ‘tale of Christmas future’ because, a bit like Old Marley, it was dead (to begin with), since the tribunal refused all arguments and did not make a reference to the CJEU.
Michelin Star replaces Master Chef
Non-profit colleges make exempt supplies of education to students. This includes education supplied to catering college students. But what about supplies made to parents of students for tasting or experiencing the result of their education? For example a school concert ticket, or a ‘test meal’ at a catering college?
HMRC has long held that, when a parent buys a ticket to the school play, the supply is taxable (subject to possible qualification for the exemption for cultural services) because the supply ‘competes’ with a general theatre experience. You do not need to be an Evening Standard theatre critic to understand how ridiculous that notion is. However, they take the view that a supply to someone other than he who is being trained/educated cannot either be one of education or one that is ancillary to education.
The point may seem faintly ridiculous when referring to parents paying for the school concert, but it becomes more difficult for charges to those tasting the meals of student chefs, or having their hair cut by hairdressing students. Somehow, the implications appear less easy to grasp. Did they buy a meal for its own sake, or are they in reality contributing towards the students’ education? Can that supply be ancillary to the students’ education, and thus exempt?
Well, the first tier tribunal thought that the supply was exempt as being ancillary to education (in the case of Brockenhurst College). The Upper Tribunal said there was nothing wrong in the first tier tribunal’s reasoning and refused HMRC’s appeal. So we were on a roll (whether Swiss, pancake, or bread). But then something strange happened:
HMRC appealed these two defeats to the Court of Appeal, where yours truly decided to attend to hear what would happen next. I found out that both parties had agreed that the issue was unclear and should be referred to the Court of Justice of the EU. I do not know why Brockenhurst College chose that route when it was already winning 2:0. But there is nothing to stop HMRC offering to waive their tax liability in return for them giving red carpet treatment to their own potential defeat. Beyond such a surmise (with no evidence) I cannot think of a reason.
To my mind, the Court of Appeal was less than happy with this. Why substitute Roux for Wallace and Torode? But it is not easy for them to refuse when both parties are asking for it. Perhaps this culture of dependency on the European Court is one that should be reviewed. It is difficult to see what causes the difficulty with this issue. The question, whilst intriguing, has been fully explored by our own expert courts which have been unanimous. The Court of Appeal judges gave me the impression of being on top of their brief, and it would have been refreshing had they simply declined to take the matter out of the hands of our domestic judicial system.
This means we now tread water while the case rumbles onwards through the CJEU system, and, by next Christmas (if we are lucky) we will have the unenviable task of trying to interpret the CJEU’s customarily opaque and unhelpful decision. The children affected by this are bound to wonder what naughty thing they did to cause Santa to deny them the present of a simple resolution from the English Court of Appeal.
Feel free to contact Graham Elliott: http://www.cityandcambridgeconsultancy.com/contact-2/