Charities are obliged to see the fruitful application of the funds they receive and donate. They also need to keep their VAT expenditure to a minimum and would be loathe to charge VAT to a benefactor. A delicate balancing act is involved. Broadly speaking, the key issue is the extent to which an arrangement is commercial in nature. There are three key considerations. Does the funding recipient undertake something in return for payment? Is there a direct link between the funding and a supply of services? Is the funding recipient carrying on a business? An existing grant agreement can become a taxable supply and possibly vice versa.
Special offer: half price
Charities can find themselves in
The subject has been considered by the courts many times, both in the UK and, in respect of the underpinning VAT principles, at the European level. Whether any given funding arrangement will fall into the VAT net is highly fact sensitive, meaning that definitive guidance is hard to extract. That said, in most
One of the basic requirements for a transaction to fall within the VAT regime is for there to be a supply ‘for’ consideration. In other words: Does the recipient undertake something in return for payment? This is sometimes expressed as the ‘reciprocity’ requirement.
It is important to be aware that the supply need not be made by the funding recipient to the funder, it can be made to a third party. In the case of Keeping Newcastle Warm (KNW) Ltd v C&E Commrs [2002] STC 943 householders contracted with KNW to receive energy advice. Meanwhile, KNW received subsidy payments from a grant agency for giving this advice. The payments from the
Furthermore, there may be more than one supply associated with any one payment. The famous case of C&E Commrs v Redrow Group Plc [1999] STC 161 is an example. Redrow, a house builder company, wished to
A supply for consideration will typically take place when a funder ceases to carry on an activity which it asks the funding recipient to take on. In this
The role of the funding can also shed light on this point. One needs to ask: would the recipient continue to do the activity in any event, whether or not it is funded by that particular funder? The answer will help distinguish between (i) funding to enable an entity to operate for its own purposes – a grant, and (ii) a payment to procure
In the charities sphere, a typical instance of
Points to consider:
Case law dating back to a 1981 case of Dutch Potato Case (Staatssecretaris van Financien v
A direct link will exist where the funder receives a benefit which corresponds to the payment, rather than an indirect or incidental benefit. In Apple and Pear Development Council v C&E Commrs [1988] STC 221 a mandatory annual charge was imposed on UK apple and pear growers in return for which the council would advertise, promote and improve the quality of apple and pears in the UK. It was decided that the payer received no direct benefit in return for the payment because the benefit accrued collectively to all the UK apple and pear growers. In contrast to this, a scheme named the Kingdom Scheme where payment was voluntary and where the growers received services directed to their specific products did have the necessary link and was therefore within the scope of VAT.
How important is the wording in the contract when determining a direct link? A Court of Appeal judge in Esporta Ltd v HMRC [2014] EWCA Civ 155 explained that ‘the contractual terms are the starting point and the Court has to consider whether those terms reflect the economic and commercial reality of the transaction’. This principle was applied in South African Tourist Board v C&E Commrs [2014] UKUT 0280 (TCC). The tourist board was charged with promoting tourism in South Africa and received the majority of its funding from the South African government. The contract was worded as a service contract and included commercial terms such as performance indicators and targets. Nonetheless, the tribunal held that in reality the parties lacked the necessary ‘reciprocity’ and the arrangement was not taxable.
Points to consider:
In some instances, even where there is both a ‘supply for consideration’ and a ‘direct link’ between the funding and the supply there may still be a question mark over whether the funding recipient is carrying on a business and is therefore within the scope of VAT in the first place. This issue has been approached in two ways:
In
Point to consider: Does the funded activity constitute a service which others would typically pay a monetary value to receive?
Can parties convert a grant agreement to a service agreement or vice versa? In the case of Bath Festivals Trust (ibid), Bath Festival Society had originally received grants from Bath City Council to promote a music festival. After the Society ran into financial difficulties the Council’s successor entity established a new company, Bath Festival Trust, to provide cultural services including the music festival. The Revenue argued that the new arrangements could not over-write what had previously been a grant relationship. This was rejected by the tribunal which determined that the relationship had changed. Interestingly, the trust received payments simultaneously by way of
One of the factors which persuaded the tribunal was that the activity undertaken by the trust was funder-led, whereas previously it had been recipient-led. In a grant scenario, the recipient typically presents an activity to the funder for which it seeks funding. In contrast, under a service agreement, it is the funder who proposes the activity and specifies the terms according to which it will pay for those services. In theory, it should be possible for a conversion to go the other way (i.e. from service agreement to grant), although this may be more challenging as it involves effectively reverse-engineering the relationship and severing existing links between payment and performance.
HMRC is adept at arguing both for and against grant funding arrangements depending on which of the two
How then can the many cases inform sensible
Charities are obliged to see the fruitful application of the funds they receive and donate. They also need to keep their VAT expenditure to a minimum and would be loathe to charge VAT to a benefactor. A delicate balancing act is involved. Broadly speaking, the key issue is the extent to which an arrangement is commercial in nature. There are three key considerations. Does the funding recipient undertake something in return for payment? Is there a direct link between the funding and a supply of services? Is the funding recipient carrying on a business? An existing grant agreement can become a taxable supply and possibly vice versa.
Special offer: half price
Charities can find themselves in
The subject has been considered by the courts many times, both in the UK and, in respect of the underpinning VAT principles, at the European level. Whether any given funding arrangement will fall into the VAT net is highly fact sensitive, meaning that definitive guidance is hard to extract. That said, in most
One of the basic requirements for a transaction to fall within the VAT regime is for there to be a supply ‘for’ consideration. In other words: Does the recipient undertake something in return for payment? This is sometimes expressed as the ‘reciprocity’ requirement.
It is important to be aware that the supply need not be made by the funding recipient to the funder, it can be made to a third party. In the case of Keeping Newcastle Warm (KNW) Ltd v C&E Commrs [2002] STC 943 householders contracted with KNW to receive energy advice. Meanwhile, KNW received subsidy payments from a grant agency for giving this advice. The payments from the
Furthermore, there may be more than one supply associated with any one payment. The famous case of C&E Commrs v Redrow Group Plc [1999] STC 161 is an example. Redrow, a house builder company, wished to
A supply for consideration will typically take place when a funder ceases to carry on an activity which it asks the funding recipient to take on. In this
The role of the funding can also shed light on this point. One needs to ask: would the recipient continue to do the activity in any event, whether or not it is funded by that particular funder? The answer will help distinguish between (i) funding to enable an entity to operate for its own purposes – a grant, and (ii) a payment to procure
In the charities sphere, a typical instance of
Points to consider:
Case law dating back to a 1981 case of Dutch Potato Case (Staatssecretaris van Financien v
A direct link will exist where the funder receives a benefit which corresponds to the payment, rather than an indirect or incidental benefit. In Apple and Pear Development Council v C&E Commrs [1988] STC 221 a mandatory annual charge was imposed on UK apple and pear growers in return for which the council would advertise, promote and improve the quality of apple and pears in the UK. It was decided that the payer received no direct benefit in return for the payment because the benefit accrued collectively to all the UK apple and pear growers. In contrast to this, a scheme named the Kingdom Scheme where payment was voluntary and where the growers received services directed to their specific products did have the necessary link and was therefore within the scope of VAT.
How important is the wording in the contract when determining a direct link? A Court of Appeal judge in Esporta Ltd v HMRC [2014] EWCA Civ 155 explained that ‘the contractual terms are the starting point and the Court has to consider whether those terms reflect the economic and commercial reality of the transaction’. This principle was applied in South African Tourist Board v C&E Commrs [2014] UKUT 0280 (TCC). The tourist board was charged with promoting tourism in South Africa and received the majority of its funding from the South African government. The contract was worded as a service contract and included commercial terms such as performance indicators and targets. Nonetheless, the tribunal held that in reality the parties lacked the necessary ‘reciprocity’ and the arrangement was not taxable.
Points to consider:
In some instances, even where there is both a ‘supply for consideration’ and a ‘direct link’ between the funding and the supply there may still be a question mark over whether the funding recipient is carrying on a business and is therefore within the scope of VAT in the first place. This issue has been approached in two ways:
In
Point to consider: Does the funded activity constitute a service which others would typically pay a monetary value to receive?
Can parties convert a grant agreement to a service agreement or vice versa? In the case of Bath Festivals Trust (ibid), Bath Festival Society had originally received grants from Bath City Council to promote a music festival. After the Society ran into financial difficulties the Council’s successor entity established a new company, Bath Festival Trust, to provide cultural services including the music festival. The Revenue argued that the new arrangements could not over-write what had previously been a grant relationship. This was rejected by the tribunal which determined that the relationship had changed. Interestingly, the trust received payments simultaneously by way of
One of the factors which persuaded the tribunal was that the activity undertaken by the trust was funder-led, whereas previously it had been recipient-led. In a grant scenario, the recipient typically presents an activity to the funder for which it seeks funding. In contrast, under a service agreement, it is the funder who proposes the activity and specifies the terms according to which it will pay for those services. In theory, it should be possible for a conversion to go the other way (i.e. from service agreement to grant), although this may be more challenging as it involves effectively reverse-engineering the relationship and severing existing links between payment and performance.
HMRC is adept at arguing both for and against grant funding arrangements depending on which of the two
How then can the many cases inform sensible
Charities are obliged to see the fruitful application of the funds they receive and donate. They also need to keep their VAT expenditure to a minimum and would be loathe to charge VAT to a benefactor. A delicate balancing act is involved. Broadly speaking, the key issue is the extent to which an arrangement is commercial in nature. There are three key considerations. Does the funding recipient undertake something in return for payment? Is there a direct link between the funding and a supply of services? Is the funding recipient carrying on a business? An existing grant agreement can become a taxable supply and possibly vice versa.