Level playing field…
Charities and Not for Profit businesses providing care and welfare services are increasingly being depended upon to take up the role previously held by the public sector of caring for the most vulnerable in society but it would be wrong to assume that all of these providers benefit from the same VAT exemption for their welfare services.
UK VAT legislation requires providers of welfare services to be charities or formally registered and/or approved as a State Registered Welfare Institution for their services to be exempt but such registration is not normally required unless the welfare service is provided in the recipients home so unless the provider is a charity, welfare services provided somewhere else, say at a day centre will be liable to VAT at 20%. This effectively puts Not for Profit businesses at a disadvantage in comparison to charities because their services will be more expensive if their clients cannot recover VAT.
However, help is hopefully at hand in the form of the EU principal of fiscal neutrality which essentially requires similar supplies of goods and services, to be treated in the same way for VAT. In a recent case at the VAT Tribunal ( Life Services Ltd [2016] TC05197) a Not for Profit business supplying services to people with learning difficulties at various locations and on its own premises won the argument that its supplies should be treated in the same way had they been supplied by a charity. held that in these circumstances. As a First Tier Tribunal decision it does not set a precedent and it remains to be seen whether HMRC accept exemption when similar welfare services are supplied by both charities and Not for Profits, or challenge the case further. The decision certainly serves as timely reminder (as if we needed one!) of the need to check your VAT position carefully.
What is business activity ?
Unlike the direct tax position, there is no blanket exemption from VAT for charities and until recently the position was clear that if a charity makes a supply in return for a consideration the supply will be treated as a business supply liable to VAT.
However, the Longridge case challenged the concept of business for this purpose. In brief Longridge ran a centre which provided tuition in water based activities. It charged for the courses but did not consider itself to be making business supplies because the courses were largely run by volunteers and charges were set only to cover costs at a level to be affordable to local families and youngsters. This was very important because the construction of the new training centre Longridge built could only benefit from Relevant Charitable Purpose (RCP) zero rate relief if it was used for non-business purposes.
Not surprisingly HMRC challenged the zero rating through the courts but the Tribunal concluded that the appellants activity was not a business for VAT purposes. Whilst a surprising conclusion, this decision was widely welcomed in the sector but it was no real surprise when HMRC challenged again. This time The Court of Appeal agreed that Longridge was making supplies for a consideration and for VAT purposes this was an economic activity (if not a business in the normal sense of the word) which brought it into the VAT net which in turn meant that regardless of the VAT liability of its income, the costs of building the new training centre were liable to VAT.
The case may have wider implications in that HMRC accept certain supplies such as welfare services to be non-business if they are supplied below cost and it will be interesting to see whether this treatment can be sustained. However, it also illustrates that it is important to check your eligibility for the property zero rate reliefs.
Please contact our Charity VAT specialist Ellen Main-Jeffrey if you have any questions about the VAT treatment of charities and Not for Profit enterprises. Contact us on-line or call 0845 177 5500.