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VAT Voice by Andrew Needham

VAT Solutions (UK) Ltd provide a summary of recent VAT cases.

Tribunal finds for HMRC re VAT recovery on jointly incurred advertising and entertaining costs

An argument advanced on behalf of the boxing promoter Frank Warren, regarding the appropriate level of input tax to be allowed on the rental of an executive box at Arsenal Football Club.

HMRC had allowed 25% of the VAT to be related to advertising, but disallowed the remainder as business entertainment. The Appellant argued that as the box was used for business meetings which start well before kick off times, and the location was a mutually convenient place for him to conduct meetings with people involved in sport and watch the matches, there was primarily a business purpose distinct from a business entertainment purpose.

The Tribunal Chairman chose ultimately to reject the Appellant’s argument, taking the line that, whilst there was admittedly a business purpose to the expenditure, ‘At the same time, any person attending the box for a match is attending an entertainment. Mr Warren uses the box for business purposes because it is in the Arsenal Football ground. The matches played there are entertainment. It is that feature that makes the use of the box, [in contrast to the use of a flat], a use for business entertainment. There is nothing 'incidental' or ancillary about the soccer match taking place when the box is used by Mr Warren. The match is the entertainment.'

The appeal was subsequently dismissed, and as a result, Mr Warren ended up with no input tax recovery at all.

Frank Warren t/a Sports Network Europe (VTD 19,213)

Comment:The fact that HMRC had accepted 25% of the cost of the hire of the box as a deductible advertising expense is of significant interest, as it seemingly conflicts with existing HMRC policy. Any businesses hiring similar facilities at sports grounds or other public venues should now look at their costs, although it would have to be on the basis that some of the area is available for advertising the hirer's name.

House of Lords holds that distance learning is a single supply of exempt education

The House of Lords has released its judgment in the case of College of Estate Management, a case concerning distance learning courses, and whether these are a single supply of exempt education or a mixed supply of exempt education and zero-rated printed matter.

The House of Lords has reinstated the original decision of the VAT Tribunal to the effect that there is a single supply of exempt educational services. The judgment includes some interesting observations on the role of the appellate courts in appeals against Tribunal decisions (basically that the higher court must review the reasonableness of the decision of the Tribunal, and must not substitute the decision it would have made given the facts reported in the Tribunal decision), as the higher court would not have been in a position to pick up nuances which might have present in the delivery of the evidence in the Tribunal.

HMRC loses again on issue of whether charitable care to children is a business activity

This is Edinburgh’s go at the question already addressed South of the Border in ‘Yarburgh’ and ‘St Pauls’, on whether a charitable body (in this case educating deaf and hearing-impaired children with British Sign Language to equip the children to function in society) funded by central and local government, is conducting a business/economic activity for VAT purposes.

The dispute initially surrounded the eligibility for zero-rating of a new building constructed for the Appellant, but then expanded to a general question of whether the Appellant supplies its services in the course or furtherance of a business.

HMRC argued that, whilst they had not appealed against the Yarburgh and St Pauls decisions, they still believed them to have been wrongly decided, and that the correct tests of a business were in the tick list which had its origins in their submission in the earlier ‘Lord Fisher’ case. HMRC then produced from the Appellant's operations no less than seventeen examples of what they consider to be indicators of business activity, and added that neither the not-for-profit basis of operations nor the charitable status were in themselves incompatible with business activity. The Appellant retorted that Yarburgh and St Pauls were correctly decided, and that the Lord Fisher check list is inappropriate.

The Appellant argued that, in determining whether there is an economic content in the operations of an organisation, one must look at the intrinsic nature of the operations and the manner in which the operations are conducted. In this particular case, the relationship with, and role of, the local authority was also important. This must lead to a conclusion that, consistent with first impressions and common sense, the Appellant fulfils a social function, and in no sense conducts an economic activity consisting of the making of supplies to the local authority which partly funds it.

The Chairman described the Appellant's arguments as 'wholly convincing', and subsequently allowed the appeal.

Donaldson's College (VTD 19,258)

High Court says supplies of carers were supplies of staff rather than ‘care’

This was an appeal by HMRC against the VAT Tribunal decision on 18 April 2005 in favour of the taxpayer.

The Appellant provides qualified (albeit not medically registered) nursery nurses, nursery assistants and carers (collectively described as 'carers') to private day nurseries, pre-schools and local authority education schools, all of whom are engaged in 'the care or protection of children' per Note (6) of Group 7.

The Tribunal had accepted that the supply was one of welfare services, notwithstanding HMRC’s argument that the Appellant was simply making a supply of staff. The Appellant is not itself regulated under any enactment, and no such regime is currently proposed. However, all the carers work in kindergartens which are subject to regulatory regimes administered by HM Chief Inspector of Schools and the local authorities. Hence the Tribunal accepted that, whilst the Appellant is not itself subject to any regulatory regime, the carers which it employs and supplies must work within the regulatory regimes applicable to kindergartens, and the Appellant could not otherwise carry on business as it does.

Counsel for K & L relied upon the level of state control under which the carers work as indicating that they are state-regulated, whilst HMRC argued that the Appellant is in no sense a 'state-regulated agency'. The Tribunal held that the Appellant was a 'state-regulated' agency involved in the care or protection of children, and allowed the appeal. HMRC appealed both aspects of the decision (the Appellant was not represented at the court).

In allowing HMRC’s appeal, Mr Justice Hart duly held the following:

- the fact that it was uncontested at the Tribunal that the Appellant played no part in the management and running of the institutions in which the carers worked, and that the carers were fully under the direction and control of those institutions, should have led to the conclusion that a supply of staff was being made, not a supply of welfare services

- the wide and indirect meaning of 'state-regulated' accepted by the Tribunal (i.e. that the carers work in a state-regulated environment), was an incorrect reading of the law, and the term 'state-regulated' had to be restricted to the status of the entity making the supply in question.

K & L Childcare Services Ltd, High Court, 4 November 2005

December 2005

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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: