Community services

(Major) goods and (collective) services: is it time to rethink charitable VAT?

Charities registered in the UK enjoy wide exemption from most taxes, so they could be forgiven for assuming they are also exempt from VAT – but that is not the case. To make matters more confusing, the law as it applies to HMRC may mean that the same payment is taxable consideration from a VAT point of view, while still being treated as a donation for the purposes of relief. gifts.

Indeed, VAT is charged on supplies made “in the course of or in the course of a business” – and, as stated in Revenue and Customs Brief 10 (2022): VAT – commercial and non-commercial activities, “the policy HMRC’s long-standing belief that commercial activity is possible even in the absence of a profit motive.” This is in line with the EU position that VAT applies to “all economic activity, regardless of the purpose or results of that activity”.

The question of whether there is “commercial activity” then becomes a delicate, factual analysis of exactly what the charity is doing and why – or, to adopt the two-step test in Wakefield College: is there a supply for consideration, and is this supply made with a view to obtaining remuneration? Earlier cases had established a useful set of “commercial test” indicators, but the brief makes it clear that they can no longer be relied upon to determine whether an activity is commercial or not. It’s the Wakefield test that counts. The old indicators may, however, still be relevant for examining the issue of purpose.

The Charity Tax Group gives a brief overview of the Brief, concluding that:

It is hard to imagine that professional advisers can advise on the basis of the Brief. More so, is it unlikely that a trustee or trustee of a charity could draw a sensible conclusion based on this guidance document. This is likely to discourage the use of charitable relief that depends on this analysis and increase traffic for already overstretched HMRC investigation staff to deal with questions about whether or not an activity satisfies the two-step test. . It is, in short, an inadequate guidance document, which should be fundamentally revised.

With all this uncertainty, one could go further and ask: would an easier way to avoid the compliance burden for charities and HMRC be to provide a broad VAT exemption for charities?

The British government has demonstrated its willingness to deviate from EU VAT principles, by abolishing the so-called 5% VAT ‘buffer tax’ on sanitary products almost immediately after ceasing to be a Member State, as well as making changes to duty-free purchases. and the introduction of deferred accounting for import VAT. He also consulted on a “full reimbursement model” (FRM) allowing ministries to recover input VAT on all goods and services, including VAT incurred in the course of non-trading activities – and concluded that “FRM remains the government’s preferred option” (although a final decision whether or not to implement it has yet to be made). In particular, if it were decided that implementing FRM was feasible despite the complexity involved in changing the VAT framework for the public sector, then that too should be within the UK’s gift (if you’ll excuse the weak pun) do the same for charities.

The UK would not be alone in this approach either. As you’d expect, jurisdictions vary, but in Jersey, for example, charities can claim GST rebates on goods and services they receive, and supplies from charities are exempt.

There are two possible counter-arguments (in addition to the potential complexity of changing VAT rules). One was also raised regarding the public sector full refund model: the differences in VAT treatment between for-profit businesses on the one hand and charities or public bodies on the other. may distort competition between these sectors. This is clearly a political issue – Canada and Ireland impose a tax on certain charitable supplies for this reason – but it seems safe to say that there is a pretty good political argument for supporting charitable purposes. Isn’t that precisely why charities generally don’t pay UK tax on the income and gains they use for charitable purposes?

The other is that implementing a broad exemption may invite tax evaders to hide behind a charitable facade – but, again, if the conditions of charitable status are sufficient to all other UK taxes, surely they are good enough for VAT?

It is difficult to determine from the available data how much of UK VAT is generated by charities and how much is spent on ensuring charities know and meet their obligations, but it would be worth considering.

[E]even though an activity may be carried on for the benefit of the community or in pursuit of charitable aims, it may still be considered a commercial activity for VAT purposes.…