Four English YMCAs have come together to appeal a decision on the VAT treatment of their funding from local authorities under the Supporting People scheme.  Unfortunately, they have lost in the First Tier Tribunal (YMCA Birmingham & Ors v Revenue & Customs [2018] UKFTT 458).  It is reasonable to assume that other YMCAs, and similar bodies, will feel the effects of the decision.

*UPDATE*: An appeal against the FTT decision has been unsuccessful – read more here.

It was agreed that the funding from the local authorities is contractual income, and the question was whether it is taxable or exempt.  Three of the four YMCAs had received HMRC rulings at the outset of these programmes, in 2003, that they were taxable.  The fourth had simply followed the resulting custom and practice.  HMRC later changed its mind, now regarding the supplies as exempt.  This is a worse position for the suppliers, since local authorities can reclaim VAT, so making taxable supplies gives a better outcome.  However, this case falls into a consistent line of cases in which HMRC seeks to deny the VAT recovery status for outsourced local authority services that the local authority would enjoy if the activity were performed by its own staff.

The details of the supplies are somewhat involved, and suffer from the familiar dilemma that such situations are very ‘fact specific’, whereas the cases often involve highly varying and uncertain sets of facts.  Put simply, no single case is identical to the next, so it is not easy to draw general conclusions in a tribunal.  The same, but on a bigger scale, bedevils attempts to draw general conclusions for suppliers of such services more widely.  Therefore, the outcome needs to be interpreted with caution.  However, at the risk of considerable over-distillation, the following explanation can be offered.

The services were those of helping young homeless people by offering, on the one hand, somewhere to live, and on the other hand, services intended the enable them to become self-reliant citizens.  These services did not involve doing the living for the young people, but getting them to a stage where they could do it themselves, through various interventions which the professional staff would judge necessary to achieve this outcome.  It is, as the title of the scheme suggests, a ‘support service’.  It is in the nature of such a service that its exact design is vague and flexible.

The basis for exemption was held to be that this was the provision of care and welfare to ‘distressed persons’ (seemingly not relying on care or protection of children and young persons, which is a separate basis for exemption).  The YMCAs made two telling points.  First, the actual services provided were not clear enough, nor sufficiently prescribed, to fall within an exemption that should be strictly applied.  Second, that the young people were only capable of being distressed if not helped, but were not distressed in the course of being helped.

It is worth stopping there to note that the definition of ‘distressed’ in the context of the welfare provisions and the HMRC concession concerning deemed non-business activity (the ‘85% test’) has always been problematic, for the very reason that a successful service is designed to keep distress at bay.  The exemption should apply to services that seek to preclude distress, not merely those for people who are distressed.  However, it seems reasonable to argue that the legislation is not configured in that way, so should not be glossed as though it was.

Nevertheless, the tribunal took the view that it was to be interpreted in such a manner (while basing the view on the issue of the extent and nature of the distress).  And that gave HMRC its victory.

The impact is considerable in regard to input tax recovery which will, as a result, be blocked.  It could prove useful in other cases for forming a basis for an easier interpretation of exempting services to the ‘distressed’ (or deploying the 85% test) in cases where output tax cannot be reclaimed on the services owing to the funder not being a local authority.  The decision cuts both ways, but is not a happy outcome for the YMCAs themselves.

Graham Elliott is CTG’s Technical Advisor and Director of City and Cambridge Consultancy