Free COVID-19 PPE in part a 'business activity' for Input VAT

In 3D Crowd CIC v HMRC [2023] TC08837, the First Tier Tribunal (FTT) partially upheld the appeal of a business established during the pandemic to provide free PPE to the NHS. The claim for input VAT was denied by HMRC on the basis that the free supplies were not taxable supplies.

• In response to the national shortage of personal protection equipment (PPE) at the start of the COVID-19 pandemic, a community interest company, 3D Crowd CIC, was established on 26 March 2020.
• The aim was to mobilise individuals with 3D printers to assist with making PPE. Through a 'Go Fund Me' account they raised over £150,000 and, by May 2020, had donated over 200,000 face masks to the NHS.
• The initial plan was to sell the PPE but this was not possible without BSI approval and a CE mark for the product.
• To meet the demand for PPE, which was the initial driver for the business, the products were donated instead.
• In order to secure any future PPE contracts, it was felt the business had to show it was capable of mass production and could navigate the issues that came with that. To this end, production, on a large scale, continued.
• The company Registered for VAT and HMRC accepted that this had been done correctly.
• The company incurred Input VAT on supplies falling into three main categories:
  • Achieving CE status for the PPE.
  • General overheads.
  • Materials bought to make the masks.
•  The company claimed the Input VAT on its VAT return but this was rejected by HMRC on the basis that there were no taxable supplies linked to the transactions.
• The decision was appealed.

The FTT established that whilst it was agreed by all that the company was a taxable person for VAT, with an intention to trade, there needed to be a link between the supplies upon which the Input VAT was incurred and the intended taxable supplies that had not yet materialised.

• Using the decision in Wakefield College v HMRC [2018] EWCA Civ 952, it was decided that, in the round, the company was operating on a commercial scale and was looking to operate on a long-term basis through commercial contracts.
• The court agreed that in order to secure future contracts, it needed to prove its capabilities on a large scale by obtaining the relevant approvals and producing the PPE in large volumes.
• The fact that no sales were ever made was not relevant.
• The court decided that some of the donated PPE (and associated supplies) could be linked to intended future sales, on the basis they acted as R&D, business samples or gifts.
• Due to the volumes produced, it was not possible to use this argument for all the donated items. Some were purely linked to the company's original intention, which was to supply the NHS with PPE in a time of national crisis.

On this basis the FTT found that:

• Input VAT incurred in relation to the BSI/CE approval process was reclaimable in full.
• Input VAT incurred in relation to general business costs and PPE production costs was to be apportioned between business and non-business purposes. Part of the costs would allow for a claim for Input VAT

The appeal was allowed.

Commentary

The judge in the case went out of his way to explain that HMRC were sympathetic to the company's plight in light of its actions during the pandemic but had no choice but to apply the legislation as they saw fit. The judge too was clearly sympathetic and it could be argued that he used whatever means available to allow the Input VAT, at least in part. Why HMRC could not have done the same and saved time and costs all round is unclear.

Useful guides on this topic

Starting in business: VAT
One of the first decisions to make when starting in business is whether or not you should register for VAT.  Am I running a business for VAT purposes and if so, when do I register?

Registering for VAT
When should a business register for and charge VAT? What are the VAT registration thresholds? What penalties might HMRC issue for late notification of registration? When do you need to file a VAT return?

Input VAT: What constitutes a valid claim (& VAT invoice)
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one? 

External link

3D Crowd CIC v HMRC [2023] TC08837