Latest from the courts
In the The Towards Zero Foundation First Tier Tribunal case the issue was whether part of the appellant’s activities could be “stripped out”, classified as non-business, and therefore result in a loss of input tax.
This case follows a long succession of recent cases on the
distinction between business (economic activity) and non-business. I have
considered these in other articles:
Northumbria
Healthcare
Wakefield
College (referred to at this Tribunal)
Longbridge
Babylon Farm
A Shoot
Y4
Express
Lajvér
Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft
Healthwatch
Hampshire CIC
Pertempts
Limited
and new HMRC
guidance on the subject.
VAT attributable to non-business activities is not input tax
and cannot be reclaimed. However, if the non-business activity is part of wider
business activities then it may be recovered as input tax.
Background
The Appellant is a charity. Its primary objective is to
achieve zero road traffic fatalities principally through the operation of New
Car Assessment Programmes (NCAP) – testing car safety.
When it received money as consideration for carrying out the
testing, it was agreed by all parties that that this represented economic
activity.
As part of this activity, the charity purchased new cars (so
called “mystery shopping” exercises) and carried out tests at its own expense. In
this start-up phase for an NCAP it is necessary to test vehicles without
manufacturer support as the independence of the testing programme is critical
in order to establish consumer credibility.
The results of the tests (usually giving rise to substandard or unsatisfactory outcomes) are published and the Appellant generates publicity of the results through social media, news coverage, trade press etc. These results inform and influence customer buying behaviour which in turn drives manufacturers to improve the safety features.
As the market sophistication increases the NCAP star ratings
for vehicles are used by the manufacturers in promotion of its vehicles.
The aim of the Appellant is for each jurisdictional NCAP to
ultimately become self-funding through manufacturer testing fees.
Contentions
HMRC argued that when the appellant carried out tests on purchased vehicles this should be recognised as a specific activity which could not be a business as it generated no income – the tests should be considered in isolation. Consequently, the input tax which was recovered was blocked and an assessment was issued to disallow the claim.
The Foundation contended that it published the results of those tests, and this resulted in the
commercial need for manufacturers to improve safety standards by way of commissions
for further research. This research was funded by the car makers and was
therefore economic activity. The “free” testing needed to be undertaken
so as to create a market for manufacturer funded testing – the initial testing was just
one element of the overall taxable supply. Consequently, all residual
input tax incurred is attributed to its taxable business activities and fully
recoverable.
Decision
The FTT found that it was clear that manufacturers would not proactively seek to have vehicles tested without an initial unfavourable baseline assessment. If the free testing had been a genuinely independent activity HMRC would be correct, but the evidence did not support this analysis. It found that the provision of free testing was an inherent and integral part of the appellant’s business activity.
This
being the case there was no reason to attribute any VAT to non-business activities,
and the input tax weas fully claimable.
Commentary
Another reminder, if one were needed, of the importance of correctly establishing whether the activities of a body (usually charities, but not exclusively) are business or non-business. The consequences will affect both the quantum of output tax and claiming VAT on expenditure. More on the topic here.
The decision was as anticipated, but this case illustrates HMRC’s willingness to challenge (often unsuccessfully) VAT treatment in similar situations.
