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Taxation on charities

Longridge on the Thames v HMRC [2016] EWCA Civ 9030

In this case, the Court of Appeal has held that economic activity carried out by the charity for VAT purposes and any supplies made on to it on the construction of a new training centre were not zero rated.

According to Value Added Tax Act 1994, any services and materials supplied in the course of construction of a building intended for use solely for a relevant charitable purpose are to be zero rated for VAT purposes.

The key issue here is the interpretation of “relevant charitable purpose,” the meaning of which is use by a charity otherwise than in the course or furtherance of a business. This definition given by statute is interpreted in line with the Principal VAT Directive (2006/112/EC) which refers to the carrying out of any economic activity.

In this case, a charity incurred VAT charges in purchasing supplies for constructing their training centre which was to be used by young people for recreational and educational activities. The use of the facilities was chargeable, however at discounted prices depending on the user’s ability to pay. These prices were subsidised by other paying users, donations and the use of volunteers to cut costs. The charity was not VAT registered and did not charge VAT on their user prices, but sought to recover the VAT paid on supplies for the construction.

The First Tier Tribunal and Upper Tribunal found in favour of the charity following a decision by the High Court in Customs and Excise Commissioners v Fisher ([1981] STC 238). On appeal, the High Court set out 6 factors relevant to identifying economic activity, including that the activity mainly concerned making taxable supplies to consumers for a consideration. HMRC appealed the decision.

The court allowed the appeal and followed the European Court of Justice’s decision in European Commission v Finland C- 246/08. The Court of Appeal held that the charity was conducting an economic activity for VAT purposes as it made supplies for consideration as part of an established activity. The fact that the use of the facilities was at a nominal rate, or that these existed for a charitable purpose did not change the fact that there was an economic activity present for VAT purposes. Zero rating did not apply to supplies made to L on the construction of its training centre.

For a consultation on whether you have been unfairly denied a VAT refund on your charitable activities please contact Graeme Perry  director of our Tax team.