A number of recent VAT cases hold interest for charities.
The tribunal decision in Queen’s Club (TC06119) will be of interest to charities which make exempt supplies which give rise, downstream, to taxable supplies. In this case the club makes exempt supplies of sports facilities to members. It also provides a catering outlet which makes taxable supplies. In practice this outlet is mainly and sometimes only used by members. The club reclaimed all of the VAT incurred on a refurbishment. HMRC thought that the input tax should be apportioned to reflect the exempt subscription income from members, but the tribunal allowed the appeal, and confirmed full recovery.
The basis for doing so was the fact that the club did not contract with members to provide them with catering, but only to provide them with the sports facilities. This was corroborated by the circumstances that members had access to particularly fine sports facilities which, without support from catering outlets, was clearly what the members wanted. The subscription income did not decline during the lengthy refurbishments of the catering facilities.
This is clearly a decision based on the facts of an unusually prestigious sports venue, but it follows on the heels of the decision in the case of Chester Zoo in which full input tax recovery was allowed (by implication) on the costs of catering outlets, but the taxable turnover of those outlets was included in the apportionment values for the costs of keeping the animals. HMRC is apt to view this as a case of tax payers wanting to have their cake and eat it, but the position can often be argued in a charity’s favour on perfectly legitimate grounds.
The tribunals have considered a case relating to charges made for a package of access to a sports facility and hire of necessary equipment to use it (Ice Rink Company TC06117). In this case the supply of access to an ice rink was treated as standard rated, but the hire of skate boots of children’s sizes was treated as zero rated. But the point could apply in other scenarios, such as exempt facilities provided with either zero rated kit (for whatever reason) or standard rated kit.
HMRC argued that where a charge was made for a session on the rink and hire of the boots, this was a composite standard rated supply. The appellant argued that the supply of the boots was a separate zero rated supply. There was a lower price advertised for access to the rink for those who brought their own boots. There was also a hire tariff for boots alone, but this was a different proposition, in essence, because the boots were then to be taken away from the rink. It seems clear, therefore that the package price for rink and boots (not to be taken away) was essentially an amalgam of a boot hire and a rink charge. The tribunal therefore decided that this was a split supply of the two separate elements, since the punter could buy access to the rink alone and therefore the price difference must be for hire of the boots.
This shows how far the doctrine of single supply has gone in taking us away from commercial reality. Had HMRC considered this simple market proposition, it would have been unlikely to have alleged that there was a single standard rated supply. That said, the point is not an easy one, and HMRC may well appeal it. Charities should meanwhile consider whether their offerings are truly a single package, or merely a presentation of two separate supplies as if they were a package.
Litton & Thorners Community Centre (TC06101) concerns the zero rate for an annex built for relevant charitable purposes. The point of contention was whether the building was an ‘annex’ as opposed to an extension of the existing building. If an annex, the construction is zero rated, but not if it is an extension. This is a common issue.
The addition was a storage unit, which had an external door, but also an internal one. Crucially, it was intended to provide storage for more than just the attached building, and was also a storage area used for another free-standing building. Thus, it had separate functionality. This was sufficient for the tribunal to decide that it was an annex, since it passed the test of having independent functionality and its own entrance. HMRC argued that the ‘main’ entrance was via the existing building, and as the legislation says that the main entrance cannot be via the existing building, this alone meant it was not an annex. The tribunal used a potentially dangerous reason to dismiss this, namely that both entrances were ‘main entrances’ in this context. There is a risk that HMRC may decide that this assertion cannot be allowed to stand and may appeal the decision.
Although unnecessary, given the decision, the tribunal also considered whether the annex could be zero rated as a completion of a new relevant charitable building. This arose because the building to which it is regarded as an annex had only been recently built, and had been designed to have the storage part, but this part of the building project had to be delayed. The tribunal decided that, in the precise facts of the case, the storage unit was simply a continuation of the original build, and thus zero rated for that reason as well. This was a courageous argument, since, if the unit can be regarded as a continuation of the build of the original building, that does not sit easily with the view that it is also an independent annex. However, as a ‘belt and braces’ argument, it was a success.
In all cases related to charitable buildings, the detailed facts are critical and no two cases are alike. However, this decision could prove helpful if not successfully appealed by HMRC.
Graham Elliott is CTG’s Technical Adviser