After a very long period of gestation, during which, seemingly long ago, CTG’s VAT Expert Group made comments on a draft, HMRC has published new ‘guidance’ concerning the vexing question of the borderline between income being a grant for VAT purposes, and being consideration for a supply. Links to all the relevant HMRC guidance can be found here.
You can view the slides from a recent CTG presentation on this issue here: CTG VAT and grants Seminar – 6 March 2018.
The issue is of fundamental importance to charities for at least three reasons.
- Unless the supply for which it is consideration would in any case be exempt from VAT, the income received may need to have VAT charged upon it (though this may be favourable to the extent it allows for input tax recovery).
- Where the recipient is a ‘S33’ body which can reclaim VAT on non-business activity, it is disadvantaged if it receives exempt consideration, because that reduces its ability to reclaim VAT under the S33 provisions (which applies, for instance, to hospices and certain museums).
- There are certain VAT reliefs on costs which only apply where the activity is non-business, and which are thus thwarted by receipt of income from exempt supplies.
For many years HMRC’s published policy has said little more than that a payment can be a grant (and therefore outside the scope of VAT) even if conditions are attached to the payment, as these would be only ‘house-keeping’ conditions. This was not controversial, but it said nothing about where a supply for consideration was being made instead. Thankfully, with the new guidance, published as part of HMRC’s Manuals, this is no longer the case. We should welcome, albeit belatedly, the fact that HMRC has revealed its policy more publicly, or, perhaps, has finally formed the policy that it should apply. Openness is always to be commended, since it allows us, charities and advisers alike, to know what we are dealing with, rather than aiming at an invisible target.
Nobody suggests that these HMRC pronouncements are the law, or must be accepted as being the correct position. Much remains unclear or has not been covered. But we are in a far clearer position than we were, and we can discuss our differences of opinion with HMRC more constructively as a result. We can also make decisions with more idea of the likelihood of being challenged.
Nature of contents
An important aspect to note is that this material constitutes ‘manuals’ which are addressed to inspectors of HMRC, to assist them in making decisions. The manuals are made public, and we can consult them. But the fact that they are addressed to HMRC staff means that they need to be read in a certain way. Thus, when, as at the beginning of the first section (VATSC51600) it says: ‘This section of the guidance will help you determine whether a payment described as a grant is consideration for a supply or not’, the ‘you’ referred to is an HMRC officer, not a charity. Of course, the points could be read as applying to a charity, but bear in mind that VAT officers are required to adhere to internal guidance, whereas charities and their advisers may decide upon another view. Accordingly, where the guidance might appear to be laying out unchallengeable views, that is because of the audience for which it is written. Allowance must be made for this. Professional advisers are aware of this (dealing with it instinctively from experience), but that may not seem obvious to the charity reader.
Manuals tend to have the same titles for many pages in a row, with seemingly minor variants. For example, the first page that concerns us has the title ‘Consideration: Payments that are not Consideration: Grants: Introduction’. The second page is: ‘Consideration: Payments that are not Consideration: Grants: What is a Grant?’. The third is: ‘Consideration: Payments that are not Consideration: Grants: HMRC’s Approach’. You will note that only the last part of each of these changes, and those changes are not terribly informative. This makes the guidance difficult to navigate, leading to a reader mistakenly investing too much meaning in each title.
The guidance breaks down into sections that first introduces the background (VATSC51600 et seq.) and then moves to a section on ‘subsidies’ (VATSC51700), then to indicators to determine the situation (VATSC51800), and finally a long section with descriptions of relevant case law.
It is perhaps too easy to get ‘stuck’ on the VATSC51600 series of pages and to seek to invest too much meaning in them. These pages set out general principles, such as the fact that a payment cannot be consideration unless it is ‘for’ a supply (rather than merely funding something). But such preparatory remarks do not move beyond the begging of the very question. They exist to set the scene.
But this scene setting makes some good points in addition to the central proposition noted above. It says that the mere fact that the payment is referred to by the parties as a ‘grant’ does not settle the point. The use of competitive tendering for the activity is suggestive of a supply rather than a grant. A grant will not usually arise where the payer has no legal power to give a grant (this predominantly relates to public sector funders).
Note that the approach taken here is to consider whether the basis exists for saying that there could be a grant, and does not get as far as giving guidance on whether one arises in a particular case. The context used could cause confusion (perhaps in the minds of HMRC officers, but particularly for lay users). Page VATSC51640 (‘HMRC’s Approach…’) says: ‘The following points will help in deciding whether a payment is consideration for a supply for VAT purposes:
- Does the grantor receive anything in return for the payment?
- Are there any conditions attached to the payment that go beyond merely having to mention it in account statements?
- What will the payments be used for?
- If the funder does not benefit directly, does any third party receive a benefit?
- Is there a contract and what are the terms and conditions?’
It is all too easy to infer, wrongly, that this suggests that anything beyond mere receipt of money for vague objectives becomes consideration. That is not what it is saying. It is asking the officer to pose those questions as a starting point to gather information for the purpose of reaching a conclusion.
In particular, the first bullet may suggest to some readers that any outcome from a grant, that is of interest to the grantor, is received by the grantor ‘in return for the payment’. But this is not the intention. The question is whether the grantor, itself, receives benefits from it, not whether anything is actually done with the money, or that the money engenders an outcome of which the grantor approves. To get to the meat of the analysis we need to move on to sections VATSC15700 and VATSC15800.
VATSC15700 deals specifically with ‘subsidies’ and makes the point that general or global subsidies of an activity are not consideration for a supply, but that a specific subsidy of a specific interaction with a specific recipient is consideration (of the third party variety) for a supply to that recipient. This is an extremely difficult issue to determine, and arises owing to a rule in the VAT Directive which requires such a sum to be treated as consideration for a supply.
This section seems to suggest that subsidies only arise rarely. This could be true, but there is no reason to assume that will always be the case, and it seems odd to include an observation relating to its likeliness in what should simply be an analytical tool. Other than that, I have no complaint about the way this difficult subject is analysed. Basically (though please actually read the page) it says that there must be a clear link (I might call it a ‘ratchet’) between a payment and a unit of delivery of something specific to a consumer. They call this an ‘arithmetical relationship’. I think this is good general description.
The guidance proceeds to VATSC51800 and here we get to the points of greatest interest to most readers. It lists a number of factors or indicators. It tells us not to simply count up the number on one side of the coin against the number on the other, but to draw a more nuanced conclusion from the overall picture. It tells us to consider the economic reality, not merely the contractual terms. I agree with those opening comments.
It then sets out nine points which fall under the title: ‘Factors indicating the payment is a grant’ (in VATSC51820). These are points such as who decided what was to be done with the money, and whether the funder benefits directly from the outcome (a core concept). It repeats some earlier comments about the powers of the funder, and deals with whether the payments only cover costs (another core concept). Whilst I would have been happier with some more nuanced analysis in parts of this, and the points are wide open to different interpretations, they are sound points in general terms, and reflect the kinds of approaches that many of us have adopted over many years.
We then move on to a section setting out examples of where the result is likely to be services for consideration (VATSC51840). Again, we are given ten bullets with examples indicating a service provision. Some of these require careful interpretation. For instance, the fourth bullet tells us that the (assumed) supplies should have the potential to make a profit. This is not intended to mean that they are expected to, but rather that the funding agreement does not preclude it. All of the points, bar the last, are ones I routinely use and are good general points. The last asks whether the payments are treated as trading in the statutory accounts of either party. Of course, there should be consistency of treatment and that any divergence should give pause for thought. But it seems somewhat circular to ask whether a prior decision by an accountant helps determine the reality of the situation. That decision would have been based on the preceding points, so is not itself of first order status. But we need to recollect that the intended audience for this is VAT inspectors, who benefit from heuristics to make practical decisions.
The next page (VATSC1860) helpfully tells us what we can ignore (‘neutral indicators’), such as nomenclature, and the level of detail in the document. The latter should not be confused with the level of precision in what is offered. In my experience many grant agreements are replete with detail but low on prescriptive precision. The message here is that you cannot say a funding agreement is for a grant simply because it weighs less on the scales. That is a good point.
After that we have pages of descriptions of court decisions. I do not doubt that these will be useful, but for the lay reader (and others) they are very dull, and seemingly inconclusive. They should be regarded as a resource, rather than required reading. I feel that some of these descriptions fail to penetrate the thicket of detail. I am disappointed that considerable weight is still put on the now very old (and to my view dubious) decisions of over 20 years ago relating to citizens advice bureaux and legal centres. I do feel that these do not stand the test of time following the Court of Appeal decision in Longridge on the Thames. But that is just a personal view – others will disagree. It is also unfortunate that the recent decision in Healthwatch Hampshire has been omitted. Is this testimony to the relatively long period in which this was drafted and approved for publication, or an attempt to ignore a decision with which HMRC does not agree? I leave you to decide, but it is definitely a minus point against the guidance.
Does this change likely policy? Not really.
Are there omissions? Yes, particularly what appear to be special treatments relating to DfID which have not made it into the guidance.
Is it easy to follow? Perhaps not, but it does not dumb down a difficult subject, and that is to be applauded.
Is it better than where we were before, without any guidance from HMRC? A resounding ‘YES’. We have been asking for this for a long time, and it will help in discussions between charities and HMRC.
Do we agree with the outcome? Yes and no. It is a tool, and the policy enshrined does not settle every question in one or other way. There could be different slants. I have not attempted a line-by-line critique. Things will emerge that we would prefer were dealt with differently. But this is not about getting HMRC to move towards us, or finding them moving away from us. It is about greater openness and clarity, which I think it does achieve. So, congratulations to HMRC for getting it out.
Graham Elliott is CTG’s Technical Adviser