In this case, the First-tier Tribunal was asked to consider the charitable status in law of the company at the effective date of VAT registration by HMRC. The company contended that HMRC's assertion it had to register with the Charities Commission contradicted the VAT Charity Notice 701/1 on charitable status of May 2004. The Appellant further contended that HMRC should back date the tax exemption to the Company's date of incorporation. The Tribunal were also asked to assess whether the original or the amended articles of association were applicable in ascertaining whether the taxpayer had charitable status.

Background

The taxpayer company Wirral Independent Recycling Enterprise Ltd (“Wire”) appealed against HMRC's decision to register it in respect of taxable supplies it made, on the basis that it was not considered to be a charity at the relevant time.

The company had been incorporated in December 2004 and registered as a limited company for VAT with effect from 1 November 2006. Wire carried on a business of selling second hand furniture. It collected donated furniture which it made available to individuals in the community considered to be in social and economic difficulty. Wire also operated a shop selling furniture directly to the public, to help fund its operations.

In November 2005, the taxpayer's company secretary investigated with HMRC the possibility of the taxpayer being VAT exempt as a charity, stating that the taxpayer's business was a social enterprise, the company was limited by guarantee and it was a non-profit organisation. He also indicated that the turnover for the shop had increased and would breach the VAT registration threshold.

HMRC responded by stating that any business, including charities, making taxable sales in excess of the VAT registration threshold, should register for VAT. They advised the taxpayer should complete a VAT 1 form and, if necessary, it could apply for exemption from registration.

Wire submitted this in July 2007. The following month, HMRC informed the company they needed to be satisfied it was a registered charity or accepted as a charity by their charities team. In response, Wire provided its memorandum and articles of association by letter, explaining that it was a social enterprise with charitable aims and its application for exemption from VAT was on the basis that it was a charity, albeit not registered with the Charity Commission.

HMRC subsequently wrote to the company to explain that its turnover had exceeded £5,000 per year and that if it was a charity, it had to register with the Charity Commission before HMRC could consider a claim to the charity tax exemptions. When HMRC found that the taxpayer was not on the Charity Commission's register, they requested the taxpayer to provide registration details or copies of correspondence which could confirm that it was unable to register. The taxpayer did not respond and the application for exemption remained unprocessed.

In 2009, HMRC officers visited the taxpayer and confirmed that it was not VAT registered and did not have charitable status. Upon review, HMRC confirmed the findings of their officers; that the taxpayer should remain VAT registered. The taxpayer then amended and, by a special resolution dated 26 June 2010, adopted its new memorandum. It was eventually registered as a charity following its adoption on that date.

On appeal to HMRC, the taxpayer submitted that it was wrong for HMRC not to recognise its charitable status as a social enterprise. It reiterated that HMRC erred in concluding that just because its income exceeded £5,000, there was an obligation to register with the Charity Commission.

HMRC contended that as early as 2007, they already informed the taxpayer that there was a legal requirement to register with the Charity Commission if its income exceeded £5,000 per year. They argued that it was not a charity because its objectives were not worded in a way that was wholly and exclusively charitable at law. They said that there was no clear separation between its objectives and powers as required by law, and that on dissolution, it could pass any assets to a non-charitable company. HMRC further submitted that the memorandum and articles of association, in their original form, were not sufficient for the taxpayer to be deemed a charity.

The taxpayer contended that HMRC should review the decision on the basis of the amended articles of association, as the original ones no longer existed. Wire stated that it was now registered as a charity with the Charity Commission and thus submitted that HMRC could back date tax exemption to the date to which an organisation started to carry out exclusively charitable aims, even if this was before the date of its registration with the Charity Commission. HMRC contended that the criterion for charitable status had not changed during the relevant period as not all of the objects of the taxpayer in its memorandum and articles of association were exclusively charitable. They maintained that the relevant articles were those in existence at the time at which the taxpayer was required to be registered, i.e. on 1 November 2006.

Decision

The First Tier Tribunal dismissed the taxpayer's appeal.

Whilst registration with the Charity Commission gave a body charitable status which would have (had the taxpayer registered) undoubtedly ensured its application for exemption from VAT would have been accepted by HMRC, it was not a prerequisite of tax relief under the law.

Furthermore, the lack of registration was not conclusive of the issue as to whether the taxpayer had exclusively charitable purposes at the relevant time on the basis that registration with the Commission had not been refused to the taxpayer, but rather registration had never been applied for.

However the Tribunal agreed with HMRC and ruled that the taxpayer was governed by its original memorandum and articles of association at the relevant time and therefore, it was on that basis that the issue of charitable status should be determined.

With respect to the issue of whether the taxpayer had a charitable status, the Tribunal noted the guidance in the case of Incorporated Council of Law Reporting in England and Wales v AG (1972) Ch 73, where Buckley LJ stated ‘To ascertain for what purpose the council was established one must refer to its memorandum of association and that alone . . . [I]n order to determine whether an object, the scope of which has been ascertained by due processes of construction, is a charitable purpose it may be necessary to have regard to evidence to discover the consequences of pursuing that object.’

After carefully considering the taxpayer's memorandum, the Tribunal found that its provisions were not worded in a way that the taxpayer was exclusively charitable. One of the objects of the taxpayer in the memorandum, i.e. to provide the local community with a ready source of fully restored and attractively finished pre-owned furniture at realistic prices, did not prevent those of unlimited means from availing themselves of the taxpayer's activities. There was nothing to prevent any member of the public from entering the taxpayer's shop and purchasing furniture.

Also, the taxpayer's object of providing charitable groups free access to its resources did not separate the taxpayer's objects and powers sufficiently.

The Tribunal also noted that one of the provisions in the memorandum, which provided for the transfer of funds on dissolution or winding up of the taxpayer, was not worded in a way so as to be exclusively charitable as it was possible for funds to be transferred to organisations with similar objects. Having found that the taxpayer's object was not exclusively charitable, it followed that the funds could be distributed to other non-charitable organisations upon its dissolution.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j6381/TC01960.pdf