The Court of Appeal recently ruled against the taxpayer “Longridge on the Thames Limited” denying the charity zero rating on the construction of its new building.
Services carried out in the course of constructing new buildings qualify for zero rating if they are intended for use for a relevant charitable purpose (other than as an office). Longridge had previously been given hope by the First and Upper Tier Tribunals, both deciding that the charity’s activities and use of its new educational centre were non-business. Unfortunately, the Court of Appeal took a different approach, resulting in Longridge suffering £135,000 of VAT on the construction work.
The facts of this case can be summarised as follows: Longridge was a charity providing outdoor recreational and associated educational activities, mainly to young people from disadvantaged backgrounds. It used volunteers to help run its activities and did not operate in order to make a profit. However, a charge was made to certain groups of individuals, based on their ability to pay rather than the level of services they received. Therefore, the services were discounted or heavily subsidised and often provided free of charge. Based primarily on UK domestic law, the First and Upper Tier Tribunals concluded that Longridge was predominantly concerned in carrying out non-business activities and allowed the zero rating for the construction of its new building.
The Court of Appeal subsequently took a different view. HM Revenue & Customs ("HMRC") persuaded the judges to focus more on EU case law concerning what constituted ‘economic activity’.
Precedent EU cases looked at whether there was a direct and immediate link between the services being supplied and the payments being received.
If such a direct and immediate link existed, the court then needed to determine whether the charity’s activities were being carried out on a permanent basis so that an economic activity was being undertaken, notwithstanding that it was not with a view to making a profit.
The Court of Appeal agreed with HMRC and concluded that both the earlier Tribunals had misdirected themselves. One judge commented: "Longridge’s supply of services is an economic activity; the facts that Longridge is a charity and its activities are non-profit making are not of any significance for this purpose".
This is an extremely disappointing case for charities generally as it means there is now far less opportunity for obtaining zero rating on new building projects. Perhaps one glimmer of hope rests with the possibility that following Brexit, the charity sector might be able to persuade the UK government to exercise its new found freedom and redraft its domestic law to reinstate zero rating for such cases.
If you have any concerns regarding the above or any other VAT issues, please contact Alan Pearce, our VAT partner, at email@example.com