Charities and non-business activities

For many years, the Courts have used a commercial motive test when considering whether a charity in question is carrying on a business or not for VAT purposes.  But HMRC dispute this method of clarification and, in truth, have been waiting for a suitable test case to take to the higher Courts to overturn some of the earlier caselaw on the subject. This case has come in the form of the  Longridge on the Thames case, which, having been defeated in both the First Tier VAT tribunal and the Upper Tier Tribunal, HMRC have appealed to the Court of Appeal.

Longridge is a charity that runs a water sports centre for children providing canoeing lessons and other activities. The charity charges for its activities, but these fees are heavily subsidised by grants and charitable donations.  The First Tier and Upper Tier Tribunals found that the organisation was not operating in a commercial or business-like manner and was therefore not operating in the course of business for VAT purposes.  The Courts’ rulings meant that Longridge was able to have its new training centre zero-rated therefore saving 20% VAT on the cost.

If HMRC win their appeal, we will have higher authority on whether a commercial motivation test has any place in VAT analysis.  If the Court of Appeal upholds the previous decisions though, HMRC are likely to further appeal the point to the Supreme Court, so it may be some time yet before the matter is finally resolved.

One concern for Longridge is if the UK Courts feel the need to seek guidance from the European Court, because the European view, generally, is that if you sell something it is a supply for consideration and an ‘economic activity’ within the VAT system; therefore, HMRC can charge Longridge the relevant VAT. One saving grace may be that European VAT law references a taxable person “acting as such”. This may allow an organisation to be doing things not in a business-like or commercial manner.

If HMRC are successful though, the cost to the not-for-profit sector could be significant by removing many opportunities to secure the construction of charitable buildings free of VAT.

If you would like to discuss this or any other issue that may affect your charity, please a charity specialist at your nearest location.

Let's talk! Send an enquiry to your local UHY expert.