This past year has been an interesting one with many developments in VAT rules and case law that have potentially far reaching impact or which simply serve as a reminder of the importance of accounting properly for VAT. We also have Brexit ‘around the corner’ which has the potential to re-write a significant amount of VAT legislation over time; although this is dependent to some extent on the ultimate Brexit model outcome.

This article highlights some of the key developments over this past year.

New rules for zero rate relief – adapted motor vehicles

New rules for zero rate VAT relief on adapted motor vehicles for disabled wheelchair users came into force on 1 April 2017. These new rules have implications for both the individual and the motor dealer.

The changes are as follows:

• A limit is now imposed on the number of vehicles which an eligible individual can purchase within a specified time period.
• A qualifying vehicle can only be bought every 3 years.
  There are provisions for exceptions to the 3 year rule where the vehicle is stolen, destroyed or damaged beyond repair; or where there is a change in medical conditions requiring a change of vehicle.
• A mandatory requirement for the customer to make an eligibility declaration using a HMRC published form (VAT 1615A).
• A mandatory requirement for motor dealers selling adapted motor vehicles under this relief to provide sales information to HMRC within a specified time frame – within 12 months of the date of the zero-rated supply.
• The introduction of a penalty if a person provides an incorrect customer eligibility declaration form.

Action

Anyone seeking to avail of or make a supply under the adapted motor vehicles zero-rating relief should ensure that they are familiar with the contents of the updated legislation and VAT Notice 1002.

Suppliers of such vehicles should also ensure that they obtain the eligibility certificate and any other additional information or documents to support the validity of the certificate and entitlement for zero rate VAT relief. HMRC expect the supplier to ensure the 3 year rule has not been breached or that evidence and supporting documentation has been obtained to satisfy an exception to the 3 year rule. A reminder that it is the supplier who is responsible to ensure that they are charging the correct amount of VAT.

If there is a change in medical condition of an individual which requires purchase of an adapted vehicle within the 3 year period because the existing vehicle is no longer suitable, an application must be made to HMRC for a letter confirming that HMRC are satisfied that the 3 year rule is waived. This letter is required by the supplier in order to make a zero-rated supply in these circumstances within the 3 year period.

Although designed to avoid abuse, there is the risk the new rules may adversely affect genuine cases which require a change of vehicle within the 3 year period but do not fall within one of the exceptions.

J&B Hopkins Ltd [2017] UKFTT 0410

J&B Hopkins Ltd entered into a construction contract with Rok Ltd, under which it agreed to construct a new place of worship for a charity. The charity had issued a zero-rating certificate to Rok and a copy of this was passed by Rok to J&B Hopkins. Both Rok and J&B Hopkins did not charge VAT on their construction services based on the zero-rating certificate.

However, the relevant legislation provides that only the supply “…….made to a person who intends to use the building for such purpose…..” (the purpose being for use solely for a relevant charitable purpose) may be zero-rated. The supply by the main contractor Rok was eligible for zero-rating but the supply by J&B Hopkins as the sub-contractor could not be zero-rated.

Accordingly, HMRC sought recovery of VAT from J&B Hopkins as its £2m supplies were standard-rated and J&B Hopkins’ appeal was dismissed. The further difficulty for J&B Hopkins was that Rok had gone into liquidation and additional payment could not be recovered from Rok. HMRC issued an assessment on the basis the amounts actually received from Rok included an appropriate percentage of VAT. The judgement notes “…The VAT would have washed through; instead, unable now to recover an amount equal to the VAT from Rok, the appellant is faced with ‘sticking’ VAT on a transaction which should have had a nil net VAT position.”

What can be learnt from this case?

This is another important reminder that suppliers of services should not rely on assurances by their customer on the VAT status of their supplies but take professional advice where necessary to ensure the correct VAT liability is being applied. It is not appropriate to rely on there being no net loss to HMRC if the customer could have but did not recover input VAT.

If the customer remained solvent, it is possible where the VAT status has been incorrectly treated as zero-rated or exempt, to seek to recover additional payment of the VAT amount from the customer either contractually or by agreement. However, there remains exposure to potential penalties.

Longridge on the Thames [2016] EWCA Civ 930

The Court of Appeal, in the case of Longridge on the Thames (a charity), determined that the water sport activities undertaken by the charity was a ‘business activity’ even though this income did not meet the cost of providing the water sports. This decision goes against previously accepted UK charity case law that where a fee or income was of a value which merely covered costs or was below costs, there was arguably no ‘business activity’ for VAT purposes.

In the Longridge case, as its activities were determined to be ‘business activities’, the charity was not entitled to have the construction of a new building supplied zero-rated to it and it therefore incurred VAT at 20% on the construction.

Why is this case important for charities and not-for-profit organisations?

This significant VAT case (which is not being appealed to the Supreme Court) may impact on the requirement for charities and not-for-profit organisations to charge VAT on income, register for VAT and the availability of certain property VAT reliefs.

This Court of Appeal decision could provide HMRC with further means to contest whether activities of a charity or not-for-profit organisation are ‘business’ for VAT purposes. This could have the following VAT implications for such organisations:

1. If an organisation not registered for VAT carries out activities which are determined to be ‘business’ for VAT purposes in accordance with the Longridge case, and the organisation cannot avail of any VAT exemptions in relation to its income, it shall be required to register for VAT where its VATable income exceeds the VAT registration threshold, currently £85,000 per annum;
2. A VAT registered organisation could be required to charge VAT on income received in respect of a wider range of activities; and
3. If a charity wishes to obtain VAT relief (zero-rating/exemption) on the acquisition, construction or letting of a building, its ‘business activities’ carried on in the building must be no more than 5%. Principles established in the Longridge case may mean income from these activities measures beyond the 5% threshold for such VAT reliefs.

It should be noted that there is already EU case law since the Longridge decision which conflicts with this case, albeit this is currently the leading UK authority in this area. Brexit may mean that the Longridge decision is here to stay.

Action

The issue of whether charitable activities are ‘business’ or not for VAT purposes has always been a debatable area and subject to continual challenge by HMRC.

In light of the Longridge case, if a charity or not-for-profit organisation charges a fee for activities, regardless of the level of fee, consideration should be given as to whether the Longridge case has implications for its requirement to charge VAT on such a fee, register for VAT or the availability of VAT relief on certain property supplies as appropriate to that organisation.

Consideration should also be given to whether income structures mitigate the potential impact of the Longridge case or can benefit from it where input VAT is sought to be recovered.

St. Andrew’s College Bradfield [2016] UKUT 0491

Sporting services supplied by two subsidiaries of St Andrew’s College, which was itself a charity, failed to qualify for VAT exemption as their constitutions did not contain any specific prohibition on the distribution of profits.

This case sought to apply the VAT exemption for supplies of sporting services by an ‘eligible body’. One of the conditions to qualify as an ‘eligible body’ for such exemption includes the requirement that the entity making the supplies is “…. precluded from distributing any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body……”.

These were wholly owned subsidiaries of a charity governed by relatively standard form memorandum and articles of association with nothing in the articles of association prohibiting distributions by way of dividend, bonus or other means. The Upper Tribunal held that there should be adopted a construction of UK legislation which departed as little as possible for the requirements of the relevant EU Directive. Even though the subsidiaries were wholly owned by a non-profit making body, St Andrew’s College, and profits were covenanted to the College, the court considered there must be express terms in the memorandum and articles of association which precludes the distribution of profits save to another non-profit making body.

Action

Any entity which treats supplies as exempt from VAT on the basis that it is precluded from distributing profits or it does not distribute profits should review its memorandum and articles of association or other relevant governing documents to ensure that it is compliant with the VAT exemption legislation. This is relevant also to those entities seeking to ensure supplies of education and cultural services are exempt.

Simple? Not really

A number of cases this year, including those above, re-emphasise the complexity of the application of VAT law in the charity and not-for-profit sector. The Office of Tax Simplification (OTS) published its interim report earlier this year on its review of the UK’s VAT system, in which it discusses areas of complexity. One of the sectors identified as warranting particular attention is charities.

Wide ranging representations were received by the OTS that the rules regarding supplies to and by charities were overly complex to administer and the OTS is reviewing what sector specific simplifications may be required with the final report planned for release in the Autumn. Watch this space.

Lyn Canning Hagan is Head of Taxation Services at GMcG Chartered Accountants

Email: haganl@gmcgca.com

Tel: +44 28 9031 1113