Recovery of VAT incurred in relation to free events
Firstly, the First-Tier Tribunal (FTT) has held that a charity could not recover VAT incurred on supplies received in relation to free events.
The FTT ruled that the provision of free educational events for school children by the charity was not an economic activity and that there was no direct link between the educational events and the income received by the charity from catering concessions. The free events were not an economic activity in their own right as they fell within the charity’s objectives.
However, interestingly, the FTT contradicted HMRC’s VAT and Charities Manual, which states that free supplies of services by a charity are non-business activities. Even though this decision, on its facts, followed the statement in the manual, the FTT suggested that there is scope to explore whether, in different circumstances, a charity would be able to recover VAT.
Consultation on tax reliefs for charities
The Charity Tax Commission has launched a public call for evidence considering how various tax reliefs are working and whether any reform to the tax treatment of charities is required. The areas under discussion are VAT exemptions, inheritance tax relief, social investment tax relief and business rates relief.
A copy of the consultation document can be found here. Responses are required by 6 July 2018.
Return of the deed of covenant?
A number of our clients have been considering the use of a deed of covenant to allow their trading subsidiaries to account for amounts "gift aided" up to their charitable parents in the year the profits were generated: even if the actual gift was made after the end of that period. Properly drafted, the deed of covenant allows the trading subsidiary and the charity to do this. This is required due to current thinking that such payments by trading subsidiaries to their charitable parent should be correctly treated (in the accounts) as distributions, which can only be accrued when there is a legal obligation to pay it under FRS 102. This may be beneficial from the perspective of the trading subsidiary when applying corporate gift aid to profits in a specific accounting period.
In addition, the deed of covenant allows the "parent" charity to accrue the payment in its own accounts despite this being before payment is actually received. The legal obligation created by the deed of covenant is sufficient to allow the accrual, which might assist a "parent" charity where it relies on profits from its trading subsidiary to maintain its solvency.
Charitable purposes and economic activities
Finally, a college has recently been thwarted in its attempt to issue a certificate that a new college building would be used solely for charitable purposes. The construction of the building would not benefit from a VAT zero-rating with a resulting cost to the college.
The Court of Appeal focussed on the fact that the new building would be used to supply courses to a small number of students paying full fees and a more significant number paying a fixed fee with the benefit of a public subsidy. The court held that the supply of educational courses for a subsidised fee were an economic activity and, hence, the building would be used in the course or furtherance of a business (and therefore not solely for charitable purposes).
It is interesting that HMRC claimed at the hearing that the result will have an impact on around 50 existing cases involving approximately £120m of VAT.
Charities undertaking building work should, therefore, take appropriate professional advice and consider very carefully whether they will use the property solely (and wholly) for charitable purposes or whether, as in this case, it may potentially be treated as being used for an economic activity.