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VAT Voice by VAT Solutions (UK) Ltd

A summary of recent VAT case decisions, by VAT Solutions (UK) Ltd.

High Court gives Charities an Opportunity to get refunds of VAT on fundraising costs

A recent decision of the High Court in Church of England Children’s Society ('CECS') has opened the way for charities to claim VAT on fundraising costs. The court held that VAT on charges levied by face-to-face professional fundraising organisations (PFO's) can be claimed to the extent that they are attributable to the charity's VATable business activities. Potentially this is a very significant victory for the charity sector and could allow significant retrospective reclaims as well as reducing charities' costs going forward.

The Children's Society employed a PFO to sign up new donors by means of a face-to-face campaign. The donors would receive a newsletter and CECS Society argued that this was a zero rated supply to which all of the VAT on the agency's fee could be attributed, and therefore claimed in full. Customs disagreed and refused their claim. They said that the payments by the donors were donations, not consideration for a supply of a newsletter. They ruled that the costs of producing the newsletter (including the PFO's fees) were not in any way related to the Society's business activities, and consequently there was no basis for any VAT recovery. The Tribunal broadly found in Customs' favour. Although it decided that the newsletter was a deemed supply, and allowed the Society to claim VAT on directly-related costs of production and distribution, the PFO's costs were for soliciting donations. Fundraising is not a business activity, and therefore VAT could not be reclaimed at all.

The High Court has overturned this decision, and found in favour of CECS. In support of this, it drew on the recent ECJ case of Kretztechnik AG v Finanzamt Linz which found that costs relating to a share issue could be treated as relating to the business's wider activity and claimed to the appropriate extent.

In other words, if a business was fully taxable it could expect to recover all VAT incurred on its costs.

The decision was a landmark one because it ruled that share issues, which were previously accepted to be exempt supplies, were in fact not supplies at all but simply a means of raising finance. In deciding on whether VAT was reclaimable, the correct test to apply was to look at the purpose for which the finance was raised - if it was to generate wholly taxable activities, then the VAT would be fully recoverable.

CECS had argued that fundraising should not be seen as an end in itself but as a means of raising income to support the charity's wider activities. To the extent that these included VATable activities, then the VAT should be allowed. In support of this it drew on the recent ECJ case of Kretztechnik AG v Finanzamt Linz as mentioned above. The High Court found in favour of the Society on this basis, and ruled that the parties should agree on the appropriate percentage of VATable use, failing which the Tribunal would be asked to decide the point.

This ruling would appear to negate the need for charities to undertake a business/non-business apportionment where they can demonstrate that their fundraising activities are undertaken to support their underlying business activities. Therefore, more VAT would fall into the residual input tax pot. Charities may need to consider a means of apportionment which is not values-based in order to ensure a more equitable allocation of costs. In addition, it also opens the way for UK charities to claim the appropriate percentage of VAT in respect of fundraising costs which previously may have been treated as irrecoverable on the basis that they were wholly used in non-business activities. Claims can go back for the last three years. It should also allow VAT to be partially recovered on such activities going forward. The relevant types of expenditure will differ from charity to charity but it should include:

• PFO charges

• Direct mailing costs

• Legacy costs

• Payroll giving recruitment

• Door-to-door, public collections and other face-to-face fundraising

• Other committed fundraising costs

Comment

Clearly, this is a great opportunity for charities to get a VAT refund, as well as reducing VAT costs going forward.

Tribunal allows VAT recovery on a private car number plate

An appeal that relates to a dispute over whether the VAT on the purchase from the DVLA of registration number 'HO 02 PER', for use on the appellant's car, was a deductible input. The appellant's business is a restaurant, located in a small village away from a main road, which had been closed for two years prior to the appellant purchasing it.

The appellant contended that he had been forced to build up a local clientele and that the personalised registration had been the most effective way of advertising the restaurant as people associated seeing the car locally with the restaurant to such an extent that the restaurant had become known by local people as 'Hoopers' rather than by its actual name of the 'Windmill'.

The Chairman accepted that a car registration could form part of obtaining local publicity and concluded that, on the balance of probabilities, the purchase of the car registration was for business purposes, and allowed the appeal.

Colin Hooper (VTD 19277)

Comment

This decision rather bucks the trend of HMRC policy to date on private number plates

Tribunal finds that grant distribution did not amount to a business activity

An appeal concerning whether supplies were being made. Appellant is a company limited by guarantee and is a non-profit making body. Its function was to administer and distribute grants on behalf of the Learning and Skills Council for England, a quango funded by Government to run the 'Learn Direct' project aimed at providing free basic learning courses for 16 to 19 year olds. The appellant was responsible, on a non-profit making basis, for administering the project locally and distributing the grant funding to learning centres which provided the courses.

HMRC ruled in October 2004 that the appellant was making taxable supplies to the learning centres in the course of a business and was therefore subject to VAT. The appellant argued that its activities were non-profit making services to the community not amounting to a business.

The Tribunal Chairman concluded that the appellant was not making any supplies of services to the learning centres. The appeal was thus allowed.

The Birmingham and Solihull Learning Exchange Ltd (VTD 19310)

Comment

This decision is likely to be applicable to many similar Learn Direct 'facilitators'

January 2006

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