08 February 2013

No such thing as a (VAT) free lunch

Graham Elliott
Consultant | UK

For readers who thought from the title they would find enlightenment on pasties, Subway toasties, rotisserie chickens, or even Jaffa Cakes, this is not about food aspect but the ‘free' aspect of the title. But it is nonetheless fascinating, so please stick with it.

The question is, can you ever get something for nothing in VAT terms?

If you pay for something from a business supplier, and unless it is exempt or zero rated, you will be charged VAT on your payment; but what if you do not pay, but the payment comes from someone else. Does that mean the supplier has to charge VAT to the ‘someone else'? The general answer is ‘yes', because that is ‘third party consideration' and the Principal VAT Directive specifically designates this as VATable. But charities may be forgiven for thinking that this does not apply to them. After all, they provide services for people who do not pay, and obtain grants or private donations towards that work. Grants and donations (which are the same for VAT) are generally reckoned to be outside the scope of VAT. And when they pay the full amount for what the charity does for its beneficiaries, the activity is regarded as ‘non-business', which means no VAT is claimed or paid. But this is arguably not always so, since the VAT Directive states that third party consideration can include ‘subsidies'. Now, most people would think that a subsidy can only be a part contribution towards the price of a service for which there is usually a full charge. But that is not true. A subsidy can pay for all of the supply, and it is debatable as to whether there ever needs to be a ‘usual' charge levied for the service. So, how can we tell a ‘subsidy' (taxable) from a ‘grant' (not taxable)? Unfortunately, there is no strict answer. Up until December case precedent on this suggested that a subsidy arose where there was a simple product, perhaps almost a ‘commodity', and usually that the subsidy from a grant provider was hypothecated to a particular beneficiary who, upon application, was provided with a ‘free' service, paid for by the grantor. But in December the First Tier Tribunal (a tax tribunal) issued a fairly perplexing decision in the case of Groundwork Cheshire (TC02407) which seemed to imply a much wider scope of ‘subsidy'. In that case a trading company of a non-profit trust provided advice to businesses, all of which was paid for by a public body, Entrust. Each piece of advice was ‘bespoke' which meant that each service was differently ‘priced'. Entrust did not require to know how much was paid for which customers, and Groundwork selected the companies that were to receive the services. Groundwork informed each business of the value of what had been provided, and that Entrust had met that value. Beyond that, the arrangement looks very much like grant funding for a free supply, and not a specific subsidy for a specific product delivery. HMRC thought it was non-business grant funded work, but the taxpayer thought it was a taxable subsidy, and the taxpayer won. It gave them the right to reclaim VAT on costs, and they could charge VAT to the recipients of the service despite the latter paying nothing. The recipients would reclaim the VAT as a business expense. This all sounds very satisfactory, but where does it leave charities in general? How many pure grant arrangements might now be interpreted as services for consideration (from a third party) and thus, surprisingly, taxable? We need to wait and see if HMRC appeals, but at the least it gives food for thought. The services may be free, but the VAT treatment is not free from doubt.

Graham Elliott Consultant | London

Category: Blog