Upper Tribunal clarifies VAT rules on 'business' activity

The tax case has clarified when a charity is running a business for VAT purposes.

The Problem

Longridge on the Thames (Longridge), a watersports activity charity in Buckinghamshire, built a new training centre. HMRC determined that construction costs did not qualify for zero-rated VAT and the charity was liable to pay a VAT sum that could have exceeded £135,000.

Longridge argued that, in line with rules for new buildings that are used wholly for "relevant charitable purposes", the construction of the building should be zero-rated for VAT purposes.

HMRC argued that it was not entitled to relief as it charged fees for watersport activities and was therefore carrying out 'business activities'.

The Principle

Longridge appealed to the first-tier VAT tribunal. The tribunal ruled that, even though Longbridge charged fees, these were only to fulfil its charitable objectives and were heavily subsidised by volunteer help and donations.

HMRC appealed and the Upper Tribunal upheld the First-Tier Tribunal decision.

The Practice

The Upper Tribunal's decision upholds previous case law on what does (and does not) constitute business activity when charging fees for charitable activities.

It is important to note that Longridge's charitable purpose, and the fact that it did not aim to make a commercial profit, were not in themselves determinative that it was not a business. Instead it was what Longridge did and the context in which it did it which was relevant to the Tribunal's assessment. In particular, the Tribunal had noted the below-cost fees, the use of grants and donations for capital expenditure and the use of volunteers to carry on its activities.

What is also important is that the Tribunal clearly rejected HMRC's argument that anything done as a contractual obligation for payment is business, whatever the context.

We recommend that any charities proposing to carry out construction work should take professional advice before proceeding.

If you have any queries on what the changes will mean in practice for your club, please call our dedicated County FA Helpline on 08448 240 432 or email [email protected].