At a time when resources are being squeezed like never before, it is some relief for charities that they can claim VAT exemption on the construction of new buildings, provided those buildings are used “otherwise than in the course or furtherance of business”. However, this recent case means that the old test for determining whether an activity is business or not may no longer be watertight.
The charity, Longridge on the Thames, built a new centre to provide water based and oth
er outdoor activities as well as instruction and training. The charity is not VAT registered and considered that the fees received for instruction and training should be classed as non-business income: it argued that the fees charged for its activities were well below cost, effectively subsidised by grants and donations received, and by the work undertaken by volunteers. This would permit the construction services for the building to be zero rated.
The UK’s ‘business test’ for VAT purposes dates back to the early 1980’s case of Lord Fisher, and has been relied upon ever since by charities and VAT courts to determine whether construction work could be afforded VAT relief. The Lord Fisher test is referred to in numerous references, including HMRC’s VAT Notice 701/1: charities. However, the ‘test’ is a series of questions or principles which are somewhat ambiguous, and open to varying interpretation.
HMRC challenged Longridge, stating that the charity was “in business” even if the charges for services were below cost, making the building services subject to VAT at 20%. The charity took its case to Tribunal and won the first two Tribunal hearings. Applying the Fisher test, the lower VAT courts found in favour of Longridge because the organisation’s ‘predominant concern’ was the furtherance of its charitable objectives, rather than the ‘making of taxable supplies for a consideration’ (i.e. money).
However, the Court of Appeal has overturned the ruling, stating that the ‘Fisher test’ no longer reflects the jurisprudence of European VAT law or the VAT decisions of the European Court. In determining whether a charity’s activity falls within the scope of VAT, it is not the charity’s reasons for supplying the service that needs to be assessed, but the activity generating the income. In other words, it is no longer relevant that charges for activities are below cost; the fact there is a charge made in connection with an activity might now be enough for the activity to be considered a ‘business’ activity.
The subsidised fees paid to Longridge were deemed a business activity, and the charity was not given VAT relief for the construction of the new training centre. Longridge now faces a VAT bill of £135,000.
Who does this affect?
This will be bad news for a lot of charities that have secured or hope to secure VAT relief on new charitable buildings on the basis of the ‘Fisher test’, or the original Longridge decision. HMRC can claim VAT retrospectively, and the latest judgment potentially lays the groundwork for HMRC to assess builders, developers and charities for historic VAT and penalties. Charities will also need to consider carefully how to raise income for providing services: if a donation is directly linked to the provision of an activity, it could be classed as income.
It is the supplier who has the responsibility for getting the VAT treatment, so builders who constructed such properties will be assessed by HMRC. If HMRC assess for VAT uncharged, the builder will be required to pay the VAT due and any penalties and interest added. In some cases, the builder will have no recourse to the charity, and will have to pay the costs. But if the contract with the charity is silent on VAT or states it is “VAT exclusive”, it is possible that the builder could go back to recoup the extra 20% from the charity.
Charities and construction clients involved in such projects over the past four years might find they need to check the legal terms of historic contracts to clarify their positon to be prepared for the VAT treatment to be questioned.
Beyond the construction or sale of new charitable buildings, the judgement may also impact previously ‘disapplied’ options to tax, such as when a building is rented out to charities for non-business purposes. It’s possible that in some of those cases VAT should have been applicable.
Longridge may appeal the decision. But if it holds, the effects will be felt throughout the charity sector.
Alice Smith is a Consultant at Campbell Tickell. For more information or to discuss this article, please contact: alice.smith@campbelltickell.com
