23 March 2018
There is a common misunderstanding in the charity world that tax avoidance, and its ugly sister – tax abuse, cannot be regarded as applying to charities except where charities are ‘hijacked’ to line the pockets of wealthy ostensible donors. But that is simply not the case. A charity which seeks to maximise its own resources for its bona fide charitable work, by entering into sophisticated VAT planning schemes, is equally open to the accusation that it has carried out an abuse.
In the VAT world, the doctrine of ‘abuse’ is a last resort weapon that HMRC can use where it is not supported in its view of the position by the black letter of VAT legislation, but it can point to two features of the behaviour of the taxpayer. The first is that the schemes, whilst appearing to comply with the legislation, defeat the general purpose of the EU VAT legislation. The second is that the essential purpose of setting up the arrangement was to avoid tax. If these two ingredients apply, then a charity is equally open to an attack from HMRC as any commercial company. Where it can be proved, HMRC can tax the charity in accordance with what would have happened if the charity had not implemented the scheme in the first place.
This point is emphasised by the recent Upper Tribunal decision in the case of the University of Huddersfield. Huddersfield entered into an extremely aggressive avoidance scheme known as a ‘lease and leaseback’ scheme, the details of which needs not detain us. This was intended to allow it to reclaim VAT on a substantial capital programme under circumstances where they would normally only have reclaimed roughly 10% of the VAT. They did this in the late 1990s at a time when tax avoidance was widespread. HMRC issued assessments for the VAT claimed on the basis of ‘abuse’.
It is not clear why the litigation then rumbled on for such a long period, but suffice to say that the First Tier Tax Tribunal reheard the case in 2013 and decided, somewhat surprisingly, that the University had not been involved in abuse. But in October 2014 the Upper Tax Tribunal reversed that decision and held that the University had carried out an abusive scheme.
There is a possibility of course that the University will appeal to the Court of Appeal.
The First Tier Tribunal’s reason for upholding the University’s view was not that its scheme had not been abusive overall, since there were aspects that it accepted were abusive. It was, rather, that it did not become obvious that there was an abuse until many years into the actual scheme, and that HMRC had assessed too early, and had assessed the wrong figure. It should have waited until later and then it could have made an appropriate assessment. This was enough to defeat the assessment issued by HMRC against the University. The Upper Tribunal regarded this dissection of the proposed transactions to be unrealistic. It pointed to the overall scheme being preordained, at least to some extent, and that therefore HMRC had grounds to think of it being abusive from the outset. The Upper Tribunal therefore held the assessment to be broadly correct.
Whatever the merits of Huddersfield’s case, the point that is abundantly clear is that HMRC will pursue charities on the basis that they are carrying out an abuse irrespective of the use to which they put the savings in tax that they ostensibly achieve, and will pursue charities aggressively owing to the track record of charities in using such avoidance schemes, albeit usually sometime in the past.
Any charity which believes it may be exposed to HMRC scrutiny from a scheme that appears to fulfil the true criteria of ‘abuse’ may want to take professional advice and in that connection they are welcome to contact Graham Elliott.