The case of The Yorkshire Agricultural Society provides useful guidance of the circumstances in which taxpayers and charities can reclaim VAT.
The Yorkshire Agricultural Society (the "Society") is a charitable company limited by guarantee. Its charitable objects are (broadly speaking) to support and promote agriculture, rural and allied industries and to champion the role of farmers. Its primary event and fundraiser is to undertake the Great Yorkshire Show (the "Show") which, together with the Society's other activities, generates in excess of £9 million gross income annually.
The Society organises two other events: 'Countryside Days' and 'Careers in Focus' (together the "Events"). Countryside Days is an annual event over two days where some 6,000 primary school children and their teachers attend the showground.
The focus is educational and includes numerous workshops and activities where participants get a hands-on experience of various agricultural and rural activities.
Careers in Focus is an annual one day event attended by some 1,500 secondary school children. The focus involves showcasing careers in agriculture, rural and allied industries.
The VAT issue
The VAT problem for the Society arose because HMRC considered that the Events were non-business activities of the Society, and thus the Society was not entitled to claim credit for input VAT incurred on costs paid in connection with them.
The Society challenged this view.
The case contains an extremely helpful synopsis of the circumstances in which taxpayers generally, and charities in particular, can obtain repayment or credit for input VAT which is attributable to the charities activities.
The fundamental question is whether the input tax incurred is attributable to the outputs of an economic activity undertaken by the charity. The test for attribution is a direct and immediate link to taxable transactions or to the economic activity of the taxpayer as a whole.
The Society’s first argument was that the input tax incurred was attributable to economic activities undertaken by the Society in its own right. It argued that the holding of the Events – and the supply of admission to them for thousands of school children – is an economic activity and there was a direct link between the inputs and the catering income (thus outputs) which was generated at those Events.
The Tribunal rejected this argument for recovery.
In their view, the link was not a direct one – it was an indirect one and arose from the Society's contracts with its caterer. Even if there were a direct link, the income received was de minimis.
The Society’s better argument was that the Events formed part of the Society’s economic activities as a whole (including the Show). Since those activities did include paid events (the Show, other paid events and the provision of the showground for third parties to hold events) input tax should be recoverable even though admission to the Events was free. They identified a number of cases which they said supported the position.
However, HMRC argued – and the Tribunal accepted – that there was a distinction between the Society’s activities on the one hand and the activities undertaken by the appellants in those cases on the other.
In those other cases, it was clear that free admission was provided for commercial reasons. While admission was free, it generated taxable income in the form of increased food, merchandise and sponsorship revenue (Imperial War Museum case); or future paid subscriptions (British Dental Association case).
The Society suggested that the Events resulted in more people attending the Show. But there was no evidence about how many of the people actually attending the Events went on to attend the Show. The evidence was simply that to some extent there was an overlap.
The Tribunal held that the Society had not established the necessary direct and immediate link between the cost of the Events and the taxable income generated by the Society. The costs incurred could not be said to be a cost component of the Show or the Society's other economic activities.
And in the circumstances, the input VAT incurred by the Society in relation to the Events was not input tax for which credit was available.
Interestingly, it was not argued before the Tribunal that the costs were incurred partly for business purposes and partly for non-business purposes and thus a proportion of the VAT incurred could have been recovered. In the absence of any such argument, the Tribunal declined to come to any conclusion as to whether, and to what extent, the apportionment provisions might apply.