This week’s Blog concerns HMRC planting seeds of doubt on the status of an event organised by a charity to raise funds; and having planted the seeds HMRC proceeded to reap a tax harvest by refusing a VAT claim and combining this with an assessment for underpaid tax
Charity & VAT: Background
The Yorkshire Agricultural Society (YAS) was a VAT-registered charitable company. Alongside several other activities, YAS ran an agricultural show each year and this was listed as its main activity on its VAT record. The show was an annual event, intended to make a surplus each year to fund the charity.
For the two years in question, the show produced a total surplus of over £3m. While not strictly promoted as a fundraising event, nevertheless the show generated most of YAS’s income and the promotional fliers, programmes and tickets all made reference to the fact that funds raised were to support the charity.
Oops, YAS made an error on their VAT Return
YAS had previously treated all income from the show as standard-rated, but submitted an error correction to HMRC in May 2020, stating that they had made an error by treating the income as standard rated (thus liable to 20% VAT) when in fact it should have been treated as exempt from VAT.
This change in treatment was on the basis that the show income fell within the fundraising exemption and led to a net repayment of VAT of £201,949. HMRC rejected this claim and, to add insult to injury, issued an assessment for the VAT period to December 2017 (where YAS had treated its income as exempt) for £90,776 in December 2021, along with several other ‘just-in-case’ assessments.
So off to the First Tier Tribunal (FTT) they went with YAS appealing against whether or not HMRC’s issue of an assessment was in time and whether income from the show was exempt.
FTT part 1 – Was it in time?
The assessment was issued almost four years after the end of the VAT quarter in question. This meant that the assessment would only be in time if HMRC was able to prove that it had received new information relevant to the raising of the assessment in the 12 months prior to the assessment being issued.
HMRC heavily relied on a letter it had received from YAS’s accountants in May 2021. The FTT chair however noted that the letter was merely asking for a response from HMRC regarding why an error correction notice had been issued and did not include any new information.
YAS argued that as the letter did not disclose anything new, it could not therefore be used to trigger a 12-month extension period. The FTT agreed with the charity and allowed the appeal, but then decided that in case HMRC took their decision to appeal, that they would also consider whether the show income was indeed exempt.
FTT part 2 – Was the income fundraising?
Schedule 9 of the VAT Act of 1994 exempts the supply of goods and services by a charity in connection with an event subject to:
- The event is organised for charitable purposes,
- whose primary purpose is raising money,
- and that is primarily promoted as a fundraiser.
HMRC argued that the show was intended as a commercial venture to promote farming and generate profits, and therefore its primary purpose was not to raise money. The FTT however considered that the show had two purposes: fundraising and educating people about agriculture, both equally weighted in the eyes of the FTT, and so it concluded that as fundraising was an ‘important purpose’ based on past court precedents, ‘important purpose’ was synonymous with ‘primary purpose’.
FTT part 3 – Was the event promoted as a fundraiser?
Having lost every argument thusfar, HMRC battered and bloodied, rallied and had one last throw of the dice by arguing that the crucial third clause of Schedule 9 (9c) had not been met, namely that YAS had not promoted the show in 2016 as being primarily for the raising of money.
The FTT considered this argument and whilst agreeing that the motivation of the attendees of the event should not affect the VAT treatment, the chair pointed out that clause 9(c) was not compatible with the Principal VAT Directive and that therefore it should be ignored,
At this point HMRC decided that it had been wrong, packed up their tent and retired to lick their wounds.
Tax Accountant’s view
Why on earth HMRC appears to be targeting charities at the moment is a mystery to me. Sure, the organisers of small charities they don’t always get it right, mainly because their workforce is primarily made up of enthusiastic amateurs. Any sins they commit are 99% sins of omission and HMRC could and should show common-sense and act a bit more charitably themselves.