Link: Case Summary Document
Citation: [2012] UKFTT 499 (TC) (United Kingdom First Tier Tribunal (Tax Chamber), M S Connell J and R Watts-Davies)
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.
Summary:
This UK case concerned payment of Value-Added-Tax (VAT), a type of consumption tax payable on goods and services in the UK. The appellant nonprofit charity, Hope in the Community Ltd (HCL), appealed against a ruling by Her Majesty’s Revenue and Customs (HMRC) that a certain amount of VAT previously forwarded to HMRC should not be repaid to it. HCL contended that the amount in question was incorrectly accounted for as output tax in accounting periods between May 2006 and August 2008. The tax paid was in relation to grant-funded projects where HCL said that the supplies to which the payment was attributable were outside the scope of VAT. HMRC contended that the supplies were within the scope of VAT and therefore the HCL was required to account for output tax on them at the standard rate.
The central question was whether the payments made to HCL, on which the tax had already been paid, were grants or not. If the payments were grants, then they were outside the scope of VAT, as charities are not required to pay VAT on grants. If they were not grants, but rather contracts, then the VAT was payable, and could be retained by HMRC.
HCL is a company registered for charitable purposes in England. Its aims and objectives are stated in its literature to be the provision of ‘an umbrella of support for faith and voluntary sector groups seeking to regenerate the communities which they serve’. HCL registered for VAT with effect from 31 October 2003. In its application for registration it described the nature of its business as ‘not for profit consultancy and community regeneration projects’.
There were five supplies in contention, to which the VAT was applied in this case. The first three were feasibility studies undertaken between January 2004 and March 2005 for Medway Council, Chatham, Kent regarding a project known as ‘the Re-use Thameswood Project’. Medway Council was the accountable body for the Thames Gateway Kent Partnership (TGKP), which had secured funding from the South East England Development Agency (SEEDA). SEEDA is one of a number of regional development agencies in England set up as non-departmental public bodies to facilitate regeneration projects. The two other supplies related to ‘management fees’ undertaken on behalf of South East England Faiths’ Forum (SEEFF) between January and March 2004. The total feasibility study fees amounted to £73,000.00 and the management fees £845.00 for a total of £73,845.00. An initial ruling by HMRC was that the supplies were taxable at the standard rate of VAT.
Later, HCL sought a formal ruling in relation to further supplies relating to ‘grants’. These were:
· The ‘Championing Neighbourhoods Project’ which was supported by the GROW programme (Giving Real Opportunities for Work) through a European Regional Development Funding (ERDF) initiative. In this project, HCL worked with other voluntary groups regarding social and economic issues which adversely affected communities and the well-being of their residents. HCL assisted the other groups in developing a management framework to encourage and enable local residents to establish projects designed to improve local regeneration, employment opportunities and cohesion within community neighbourhoods. In particular, HCL provided a range of services including case studies, a management framework to record and collate information regarding the project, the production of a website and the holding of meetings and conferences;
· The Guide Neighbourhood Project funded by the Home Office through ‘Housing Justice’, a charity working in the area of social housing and homelessness;
· The Share First Project which involved a feasibility study relating to the potential salvage and use of surplus supermarket foodstuffs.
HMRC ruled that all the projects involved taxable supplies because the parties assisted by HCL obtained a benefit. HMRC said that whilst grant funding may pass down a chain and remain outside the scope of VAT at each step, it would be rare for that to happen more than twice, and where it did, in reality, the payment was consideration for the activities outsourced to HCL.
There was considerable correspondence between the parties relating to the status of these supplies, and others which were in contention. Eventually, on 18 August 2010, pursuant to the Tribunal’s direction, HCL provided details of the projects to which its claim for reimbursement of VAT related and the supplies which were the subject of its voluntary disclosure of VAT liability. These were as follows:
| Project Name | Funder | Documentation | Amount claimed | HCL’s description of payment | |
| 1 | Guide Neighbourhood | Housing Justice | Grant letter; Grant terms and conditions MOU | £30,127.57 | Grant |
| 2 | Employ Kent Thameside | Kent Thameside Delivery Board | Agreement
MOU |
£174.97 | Grant |
| 3 | Sharefirst | SEEDA | Grant Letter
MOU |
£1,806.59 | Grant |
| 4 | Becoming More Enterprising | Enterprise Agency Kent | Invoice
MOU |
£70.00 | Educational |
| 5 | Swale Services | Medway Council | Agreement
MOU |
£2,174.24 | Grant |
| 6 | Bromley-by-Bow | SEEDA | Grant Letter and
Schedules MOU |
– £60.88 | Grant |
| 7 | Swanscombe Café | Dartford BC | Agreement and Schedules MOU | – £314.43 | Grant |
| 8 | Championing Neighbourhoods | GROW | Grant letter and Annexes; letter dated 20 August 2009. MOU | £4,286.63 | Grant |
| 9 | Re-use Thameswood | Correspondence
MOU |
£382.75 | Disbursement | |
| 10 | Developing Community Experiences | United Reform Church | Correspondence
MOU |
£912.47 | Educational |
| 11 | Global Grant Funding-Interfaith Project | TGKP | Agreement
MOU |
£2,304.96 | Disbursement |
| 12 | Valuing Community Experiences | URC | Agreement
MOU |
£553.86 | Educational |
| 13 | Faiths Together Conference | SEEFF | Agreement
MOU |
£636.65 | Educational |
HCL’s ground of appeal was that it should not have paid the VAT on these supplies since they were grant-based, and were for the purpose of funding projects which were of benefit to local community and voluntary groups. They were supplies which were not for consideration and so were outside the scope of VAT.
HMRC took the position that the question of whether an agreement constitutes a supply for consideration (i.e. one which is taxable) is one of fact, and that the concept of ‘supply’ must be given a broad definition for the purposes of VAT. HMRC said that VAT liability is determined by the substance of the agreement, and the parties cannot elect to remove a supply of services for consideration from the VAT system simply by referring to it as a ‘grant’.
The Tribunal said that the determination of whether the supplies were taxable required a close examination of the underlying documentation. Were there contracts involved rather than grants? Whether or not a legal relationship existed and whether or not the funder was to benefit from the services were only issues to be taken into consideration in this examination. However, taking all the evidence into account, the arrangements in contention were contractual. The Tribunal thus concluded that the services provided by HCL in return for payments described as ‘grants’ were supplies for consideration within the meaning of section 5(2)(a) of the VAT Act 1994. Therefore, the appeal was dismissed and HCL was liable for standard-rate VAT on all the relevant projects.
The case may be viewed at: http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02175.html
Implications of this case
This case has important implications for charities in the UK. The distinction between a contract and a grant is crucial to VAT liability. The words are often used loosely or even interchangeably in funding in the UK. Since a contract involves the exchange of goods and services for consideration, VAT is payable. Charities which obtain funding for their own projects will be using grants (which are not taxable). Charities which are paid by others to carry out a project, even where the project aligns with the charity’s objectives, will be engaging in a contract, on which VAT will be payable.