VAT Update from Chantrey Vellacott DFK
1. Changes to the Business Test
The concept of “business” is fundamental to VAT. Whether an activity is regarded as a business activity determines both whether it falls within the scope of VAT for the purposes of output tax and whether VAT
incurred upon goods and services relating to it can be regarded as input tax.
For charities it is a particularly crucial concept. If a charity’s activities are regarded as being wholly non-business then the option to tax will not apply to supplies of accommodation by landlords and a charity
can obtain new buildings zero-rated. Unfortunately the VAT legislation tends to favour the extremes when it comes to charities and ‘business’. Charities with wholly business taxable activities can recover all their
VAT as input tax. Charities with no business activities are able to obtain property VAT free. Unfortunately, Charities with some business activities will suffer a restriction in their VAT recovery. As most charities
are in this position VAT has become a major financial burden for the charitable sector.
As the concept of ‘business’ is so important to charities any changes to the way it is interpreted are obviously of great interest.
Business is not fully defined in the VAT legislation and its interpretation has been left largely to the courts. From these decisions a number of business tests have emerged which require an activity to involve
the making of taxable supplies to be organised in a certain business like manner and be of a certain scale. What has never been important is the absence of profit motive. This principle was established in the early
VAT case of Morrison’s academy. Here a charity provided boarding accommodation for school children. Although it was not provided on a profit making basis the court found that the supplies it made were “of a kind
which subject to differences of detail were made commercially by those who sought profit from them” and were therefore a business activity.
It is interesting to contrast the Morrison’s decision with the most recent VAT tribunal case on what constitutes business, that of St Paul’s Community Project Limited. Here a charitable day nursery charged £95 per
week against an average competitors charge of £118 per week. As the cost of providing the service was over £130 it was in receipt of subsidy from external funders. In this case the tribunal found that the activity
should be regarded as a “charitable activity” which it equated with being non-business. As a result the nursery was able to obtain zero rating on its new building project. This was obviously a great benefit to them
as had the childcare activity been regarded as business it would have been making VAT exempt supplies and they would have been unable to recover the construction VAT.
The tribunal decision in the St Paul’s case was appealed and the High Court confirmed the activity was non-business.
The outcome of this appeal it shows that the business question is no longer as straight forward as it once was. Tribunals are willing to take a more flexible attitude towards the question of whether a charity’s
activities are involved in business activities. It is worth you reconsidering whether you are adopting the correct or most beneficial approach to the VAT business question. This will be especially true if you have
incurred irrecoverable VAT on a new building within the last 3 years.
2. Customs Policy on whether a charity is engaged in business
Following their defeat in the St Pauls Community Project Case, Customs have issued a business brief accepting that Charity nursery providers can in many circumstances now treat their activities as non-business. It
is likely that the case could benefit a wider group of Charities than just nurseries. Charities that have commissioned new buildings within the last 3 years and are engaged in Welfare work may also be able to obtain
a VAT refund.
3. VAT on Employee Purchased Fuel
In December, the Advocate General of the European Court delivered an opinion ruling that the current UK practice of permitting employers to recover VAT on employee mileage allowances was against European law.
Although this is not the Court’s final decision, clients should be aware of the likelihood that this relief may be withdrawn. There are alternative structures which continue to allow VAT recovery.
4. Three-Year Cap
The recent case of the Marguerita Hoare School of Dancing has once again thrown the spotlight onto the operation of the three-year cap on VAT refunds. There may now be grounds for arguing that the cap does not apply
if you can show that you questioned an incorrect VAT treatment advised by Customs in the past.
(c) CVDFK 2005
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