Category Archives: Charity

VAT: Car parking provided by a hospital – Exempt? Non-Business? Taxable?

By   20 April 2021
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Latest from the courts

In the Northumbria Healthcare NHS Foundation Trust (The Trust) First Tier (FT) case the issue was whether pay and display car park charges were subject to VAT considering the status and activities of the Trust.

Background

The Trust provided parking for staff and visitors at the 14 sites for which it was responsible. The question was whether output tax was due on the parking charges. The Trust submitted a claim for overpaid VAT considering that either:

  • there was no economic activity, or, if there was,
  • there was a “special legal regime” which meant that tax was not due because The Trust was not a taxable person, or
  • the parking charges were closely related to the Trust’s exempt activity (medical care) such that they themselves were exempt

HMRC rejected the claim on the grounds that car parking is a standard rated supply and The Trust appealed against this decision.

It was agreed that The Trust, in carrying out its statutory activities (NHS medical services) is not in business (no economic activity) and therefore the services were outside the scope of VAT. Some private medical services were also supplied, and it was common ground that these were exempt.

Decision

The court found that:

  • the Trust made supplies for a consideration for the purposes of obtaining income on a continuing basis so there was economic activity
  • the Trust did not provide car parking under a “special legal regime” as a public authority; there is no concept of special legal regime in the relevant legislation
  • the treatment of The Trust as a non-taxable person re; car parking would lead to significant distortion of competition
  • supplies of car parking were not closely related to medical care. The service must be an indispensable stage and integral in the supply of medical services, ie; the diagnosis, treatment and cure of diseases or health disorders
  • the supply of car parking was consequently a taxable business activity carried out by a taxable person, was not exempt, so output tax was properly due.

Commentary

We are aware of a number of cases stayed behind this appeal and there will be disappointment, but little surprise (I suspect) at the outcome. Car parking is a significant source of income for hospitals, medical centres and clinics etc, but this case made it clear that there is no difference in VAT terms between hospital parking and other commercial car parks.

VAT: Postponed Accounting available for Section 33 bodies

By   13 April 2021
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HMRC has announced that bodies covered by The VAT Act 1994, Section 33 such as; Local Authorities, Academies, Transport Authorities and the Police can use Postponed Accounting for imports.

Normally, a body cannot account for import VAT on its VAT return if it import goods that it knows will be used solely for non-business purposes. However, this no longer applies to a body that is eligible to reclaim import VAT through a VAT refund scheme (Section 33). Section 33 entities when completing its customs declaration, should select the “making an immediate payment or using a duty deferment account” option.

Section 33 bodies

These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!

We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.

A CASC is not a charity for VAT – The Eynsham Cricket Club case

By   2 March 2021
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Latest from the courts

In the Court of Appeal (CoA) case of Eynsham Cricket Club (ECC) the issue is whether a Community Amateur Sport Club (CASC) is able to take advantage of VAT reliefs in the same way as a charity.

Background

The question was whether supplies of construction services of building a new cricket pavilion for a CASC qualify for zero-rating via The VAT Act 1994, Schedule 8. Group 5, item 2 (a) “The supply in the course of the construction of a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose…”Emphasis added.

The outcome depended on whether ECC was a charity. That in turn depends on whether:

  • ECC was “established for charitable purposes only” pursuant to Schedule 6 to the Finance Act 2010
  • Section 6 of the Charities Act 2011 applied and had the effect of preventing ECC from being treated as “established for charitable purposes”
  • ECC satisfied the other conditions, and in particular, the “registration condition”

Decision

It was determined that CASCs cannot be treated as charities for VAT purposes as the above criteria were not met. Therefore, the construction of ECC’s new pavilion did not qualify for zero-rating and was standard rated. It was noted that becoming a CASC meant that certain charitable benefits were forgone in return for relief for certain administrative and management chores.

Commentary

It appears that ECC had the opportunity to register as a charity, but apparently, unlike a near neighbour cricket club, decided not to.

“Charity” is not defined in VAT legislation, so this case is a reminder that it should not be assumed that every entity which may have charitable objectives, or generally exist in order to benefit a section of the community qualifies as a charity for the tax.

VAT – Apportionment issues: Complex and costly

By   16 February 2021
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The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”. 

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

  • Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies.  As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

  • Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above.  The construction of the commercial part is standard rated, but the building of the residential element is zero rated.  The contractor has to apportion his supply between the two VAT rates.  This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result.  The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC.  I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

  • Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax.  The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

  • Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

  • Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment.  Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated.  There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position.  New products are arriving all the time and circumstances of a business can change.  A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away.  They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

  • Opticians

Opticians have a difficult time of it with VAT.  Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated.  Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in.  Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

  • Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs.  VAT attributable to non-business activities is not input tax and cannot be reclaimed.  Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities.  There are many varied ways of doing this as the VAT legislation does not specify any particular method.  Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

  • Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies.  The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC.  Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly.  Exemption is not a relief to a business.

  • Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

  • Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

  • Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

  • Motoring expenses

It is common for a staff member to use a car for both business and private purposes.  Input tax is only recoverable in respect of the business use so an apportionment is required.  This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method.  There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer.  Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

What VAT CAN’T you claim?

By   2 December 2020
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VAT Basics

The majority of input tax incurred by most VAT registered businesses may be recovered.  However, there is some input tax that may not be.  I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT Claims

A brief overview

  • No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice)” although it may be import, self-billing or other documentation in specific circumstances.  A claim is invalid without the correct paperwork.  HMRC may accept alternative evidence, however, they are not duty bound to do so (and rarely do).  So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation.  HMRC are within their rights to disallow a claim if any of the details are missing.  A full guide is here.

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it.  If a business makes only exempt supplies it cannot even register for VAT.  There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief.  Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here.

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas.  The input tax incurred on staff entertainment costs is however recoverable.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  •  A business using certain schemes

For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on TOMS users

  •  VAT charged in error

Even if you obtain an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate.  A business’ recourse is with the supplier and not HMRC.

  • Goods and services not used for a business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for business use.  This may be because the purchase is for personal use, or by anther business or for purposes not related to the business.

  • VAT paid on goods and services obtained before VAT registration

This is not input tax and therefore is not claimable.  However, there are exceptions for goods on hand at registration and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked. Details here.

  •  Second hand goods

Goods sold to you under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant VAT body in those States. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

Input tax incurred on expenditure is one of the most complex areas of VAT.  It also represents the biggest VAT cost to a business if VAT falls to be irrecoverable.  It is almost always worthwhile reviewing what VAT is being reclaimed.  Claim too much and there could well be penalties and interest, and of course, if a business is not claiming as much input tax as it could, this represents a straightforward cost.

VAT: Is the supply of football pitches an exempt right over land? The Netbusters case.

By   11 November 2020
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Latest from the courts.

In the First-tier Tribunal (FTT) case of Netbusters (UK) Limited the issue was whether the supply was the standard rated provision of sporting facilities, or an exempt right over land.

Background

Netbusters organised football and netball leagues and provided the playing facilities (artificial pitches for football and courts for netball). The hire of the facilities was for a defined period of time and no other party had the right to access the pitches during those times. The hire could be a block, or one-off booking. The appellant contended that the supplies were exempt via VAT Act 1994, Sch 9, Group 1 – “The grant of any interest in or right over land or of any licence to occupy land…”  However, item 1 Note (para m) excludes the “the grant of facilities for playing any sport or participating in any physical recreation” in which case they become standard rated. To add complexity, Note 16 overrides the exception for sporting facilities (so they are exempt) if the grant of the facilities is for:

“(a) a continuous period of use exceeding 24 hours; or

(b) a series of 10 or more periods, whether or not exceeding 24 hours in total, where the following conditions are satisfied—

(i) each period is in respect of the same activity carried on at the same place;

(ii) the interval between each period is not less than one day and not more than 14 days;

(iii) consideration is payable by reference to the whole series and is evidenced by written agreement;

(iv) the grantee has exclusive use of the facilities; and

(v) the grantee is a school, a club, an association or an organisation representing affiliated clubs or constituent associations.”

I have a simplified flowchart which may assist if you, or your clients, need to look at these types of supplies further.

Another issue was whether Netbusters’ league/tournament management services which were, in principle, available independently of pitch hire, but in practice rarely were provided in that way, were separate supplies or composite. There was a single price payable for both pitch hire and league management services.

The appellant contended that its supplies were exempt via VAT Act 1994, Sch 9, Group 1 or that Revenue and Customs Brief 8 (2014): sports leagues, is applicable which states “HMRC accepts that the decision of the FTT is applicable to all traders who operate in circumstances akin to Goals Soccer Centres plc. This includes traders who hire the pitches from third parties such as local authorities, schools and clubs…”

HMRC argued that there was no intention to create a tenancy and the agreements between the parties did not provide for exclusive use of the premises, so the supplies fell to be standard rated.

Decision

The appeal was allowed; the supply was a singe exempt supply because the objective character of the supplies were properly categorised as the granting of interests in, rights over or licenses to occupy land. It was found to be significant Netbusters (or its customers) had the ability to exclude others from the pitches during the period of the matches.

It was therefore unnecessary to consider whether Netbusters’ supplies grants of facilities satisfy all the conditions set out in Note 16 (although the FTT were disinclined to do this anyway as a consequence of the way respondent prepared its case).

Commentary

The issue of the nature sporting rights has a long and acrimonious history both in the UK and EU courts. Any business providing similar services are advised to review the VAT treatment applied.

VAT: Education and catering – University Of Southampton Students’ Union case

By   6 November 2020
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Latest from the courts

In the University Of Southampton Students’ Union (USSU) First Tier Tribunal (FTT) case the issue was the VAT treatment of supplies of hot food and coffee; whether the appellant was an eligible institution making principal supplies of education or vocational training and/or whether supplies of hot food and coffee closely related to such principal supplies.

Background

USSU argued that both the supply of hot food and coffee by the USSU shop are exempt via The VAT Act 1994 Schedule 9, group 6, Item 4(a) and note 1(e) as supplies made by an eligible body which makes principal supplies of vocational training, and which are closely related to the (exempt) principal supply of education by the University of Southampton or vocational training by USSU. In the alternative, exemption applies for matters closely related to supplies of education by a third party via a published HMRC concession (and its supplies were within HMRC’s conditions for such a concession).

HMRC disagreed and claimed that these supplies were not closely related to education and that USSU was not an eligible body (no ring fencing of the profits such that they were not necessarily reinvested in its own supplies of education). Therefore, the supplies were properly taxable, and they declined to pay the appellant’s claim of overpaid output tax. The respondent also cited the Loughborough Students’ UnionUpper Tribunal (UT) case.

Decision

The appeal was dismissed for the following reasons:

  • USSU did not satisfy the definition of vocational training
  • the supplies of hot food and coffee were not closely related to a supply of education or vocational training
  • USSU did not satisfy the definition of an “eligible body”

Commentary

Superficially, the claim seemed good. Para 5.5 of PN 709/1 states: “If you’re a student union and you’re supplying catering (including hot takeaway food) to students both on behalf, and with the agreement, of the parent institution, as a concession you can treat your supplies in the same way as the parent institution itself. This means that you can treat your supplies as exempt when made by unions at universities.. This means that most supplies of food and drink made by the union, where the food is sold for consumption in the course of catering will be exempt… For example, food and drink sold from canteens, refectories and other catering outlets (excluding bars), plus food and drink sold from vending machines situated in canteens and similar areas.”

However, the Notice then goes on to add “But it does not cover food and drink sold from campus shops, bars, tuck shops, other similar outlets and certain vending machines…”

This appeal looks a close-run thing, but it demonstrates that small differences in detail can produce different VAT outcomes. We urge all Student Unions and other entities “attached” to education providers to review their position.

VAT Planning – Why?

By   20 August 2020
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Why? How? Where? When? What? Who?

Why?

It is impossible for any business to do such a basic thing as set its prices properly unless it understands its VAT position and ensures that this is reflected in those prices, terms and contract terms etc. The aims of tax planning are:

  • compliance
  • business planning
  • avoiding unnecessary tax costs
  • maximising input tax claims
  • minimising VAT payable where possible
  • obtaining any refunds and retrospective claims due
  • avoiding penalties and interest

How?

The “How?” is dependent on the specific business and its needs. We offer a flexible and tailored service from start-ups to multi-national companies. We offer:

  • solutions to ad hoc issues
  • negotiation
  • structuring and restructuring
  • contractual arrangements
  • Dispute resolution (with HMRC, suppliers, customers etc)
  • full reviews and health checks
  • training of staff and management
  • assistance with international/cross-border supplies and purchases
  • due diligence
  • cost reduction exercises
  • income maximisation programmes
  • comprehensive land and property advice
  • advice on overseas indirect/GST matters both EC and non-EC
  • accounting and documentation advice

The VAT planning process – “The four As”

  • Ascertainment
  • Analysis
  • Alternatives
  • Action

More details of this approach here.

Where?

VAT, or its derivations applies in most countries around the world. So, the answer is probably “everywhere”. This is particularly relevant with cross-border transactions. A common issue is the “Place Of Supply” (POS) rules which dictate where a supply takes place and thus the VAT liability of it.

When?

Planning needs to be done in advance of transactions.  Once a contract has been entered into without thought for the VAT consequences, the damage may have already been done.

Where there is a one-off transaction (eg; sale of premises, sale of know-how, issue of shares), this is, by definition, something of which the business has little experience.  It is an occasion to assume that advice is needed, rather than to assume that the most obvious treatment is correct.

Since the impact of a change in the pattern of a business’ activities will continue down the years, rather than being restricted to a single occasion, it is doubly important to ensure that the correct treatment is identified from the outset.

Periodic reviews are a good time to look, not only at the future, but also at the past, to see whether developments in case law reveal past overpayments which may be reclaimed.  This is particularly important since repayments are subject to the four-year capping provisions.

The essential step is to have some means of becoming aware of changes and monitoring these with VAT in mind.  The means to be adopted are various and will depend on the size and type of the business.

What?

“Right tax, right time”. This means compliance with the relevant legislation but not paying any more VAT than is necessary. As one wag once said; “You must pay taxes. But there’s no law that says you have to leave a tip.”

Since VAT is a transaction-based tax, timing is often crucial and the objective is to legitimately defer payment to HMRC until the latest time possible, thus improving cash flow and retaining the use of VAT monies for as long as possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. We must also consider avoiding VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available.

VAT Planning objectives

  • improve cash flow
  • improve competitive position
  • legitimately reducing VAT payments or increasing repayments
  • minimise administration/management
  • avoid unnecessary tax or compliance costs
  • avoid penalties and interest

Who?

Marcus Ward Consultancy of course!

VAT: Changes to online advertising by charities

By   11 August 2020
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In very welcome good news from the Charity Tax Group (CTG) the zero rating for charity advertising has been extended to previously standard rated supplies

Background

Certain (“traditional”) advertising services received by a charity have always been zero rated. However, the zero rating did not cover advertising that was ‘selected” or targeted”. HMRC has always been of the view that websites which use cookies which target certain potential donors fall within the exemption such that standard rating applied which commonly represented an additional cost to a charity.

Changes

However, the CTG has announced that lengthy ongoing discussions with HMRC have finally borne fruit. HMRC have indicated that they have “relaxed“ their position and now agree that supplies of digital advertising to a charity may qualify for zero rating, even if cookies are used. This is not a blanket policy, but it does broaden the availability of zero rating which will mean an absolute saving for most charities.

Exceptions

Advertising which is sent to a social media personal accounts, or where the recipient has paid a subscription for the site, continues to be standard rated.

Action

Charities should review their advertising activity for the last four years to establish whether they have a retrospective claim. Measures should also be put in place to ensure that VAT is not overpaid in the future. We can assist with making claims if required.

VAT: Whether a person “in business”. The Y4 Express Ltd case

By   7 August 2020
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Latest from the courts

In the Y4 Express Ltd (Y4) First Tier Tax Tribunal (FTT) case the issue was whether an individual was in business such that he was entitled to be VAT registered.

Background

Y4 imported goods from China on behalf of UK customers. This entailed collecting the goods from the airport, storing them and then arranging delivery of them to the final customers. Y4 had an arrangement with Royal Mail (RM) for a discounted delivery rate. RM subsequently withdrew this discount resulting in Y4 incurring increased delivery costs. In order to mitigate this, Y4 put a structure in place using an individual (Mr Man) to contract with RM for the discount and letting Y4 use the account to take advantage of the reduced rates: RM invoiced Mr Man and Y4 would arrange payment from its own funds via direct debit. Y4 dealt with Mr Man’s VAT compliance and raised self-billing documents to itself on which it recovered input tax. It was reported that Mr Man considered this as a favour to a friend rather than as a business venture with a view to making a profit, and indeed, the charges made by RM were not marked up. Mr Man was not involved with the arrangement of deliveries of Y4 carried out by RM.

HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4. This was on the basis that the individual was not carrying on an ‘economic activity’.

Decision

The FTT agreed with the respondent and upheld the decision to disallow Y4’s claim for input tax. This was on the basis that Mr Man was not in business so could not make supplies to Y4, which in turn meant that there was no input tax for Y4 to claim.

Commentary

The issue of whether an entity is “in business” goes back to the earliest days of VAT. I have considered the issue and recent case law here here here here and here.   HMRC relied heavily on the age-old (well, 1981) tests in the Lord Fisher case:

  • Is the activity a serious undertaking earnestly pursued?
  • Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  • Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  • Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

The judge found that the tests were not met by Mr Man and, even if they were, the evidence; the self-billing documents, were insufficient. It was also found that a penalty was due, although the quantum was reduced to reflect the cooperation of the taxpayer during the enquiries.

This appeal further demonstrates the ambiguity that often surrounds the definition of a business, and/or an economic activity (the EU legal definition). This is often an issue for charities and NFP bodies, but can extend to other areas such as in this case.