In the Trustees of the Institute for Orthodox Christian Studies v HMRC [2015] TC04622 the First Tier Tribunal (FTT) confirmed that HMRC was entitled to raise an assessment for output tax on the sale of a property to the appellant as it was not subsequently used solely for a relevant charitable purpose.
The Appellant is a registered charity whose aim is to further religious education and knowledge of the doctrines, history and culture of the Orthodox Church.
Background summary
- The appellant purchased a property and declared that it intended to use it for relevant charitable purposes
- The vendor therefore did not charge VAT on the sale even though it had opted to tax the property
- In its fund raising brochure the Charity set out the purposes for which the building would be used, including a library, lecture and seminar rooms, areas for study, and in due course some accommodation for residential students and visiting scholars
- The Charity charges fees for attendance at lectures and seminars although the costs of providing these are heavily subsidised by donations and grants
- The appellant let out rooms in the property to tenants before undertaking major conversion and refurbishment. Approximately two-thirds of the rooms were let
- HMRC contended that this was constituted a business use and raised an assessment for £133,333 output tax on the sale
Relevant Legislation
The legislation allowing the vendor not to charge VAT on the property is containe in the Value Added Tax Act (VATA) 1994, Schedule 10, paragraph 7:
(1) An option to tax has no effect in relation to any grant made to a person in relation to a building or part of a building intended by the person for use-
(a) solely for a relevant charitable purpose, but
(b) not as an office.
"relevant charitable purpose" is later defined as use by a charity "otherwise than in the course of furtherance of a business"
Appellant's argument
When the building was identified by the charity for possible purchase a number of rooms were occupied by business tenants. The charity requested vacant possession, and a three-month notice was given to tenants.
The Charity later noted that it would not immediately have sufficient funds to begin converting the property for its intended use and after attempting to raise funds by bank overdrafts or mortgage facilities offered short term tenancies to the tenants to raise monies to offset overheads before conversion work could begin.
The Charity contacted HMRC to confirm that letting out temporarily unused space would not be regarded as a business supply. HMRC advised that it would not, as long as all income was directed to furthering the purposes of the Charity.
The Charity argued that as the rooms were only let for a temporary period to cover overheads this could not reasonably be considered a business activity. Further, the trustees were attempting to comply with their obligations to minimise costs and preserve the Charity's resources.
HMRC's argument
HMRC contended that as two thirds of the property was rented out it did not matter whether this was temporary or not; this constituted business use.
Tribunal decision
The FTT noted the following:
- there is a presumption that the supply of goods or services in return for consideration amounts to a business activity
- the onus is on the Appellant to show that the nature of its activities is such that it is not carrying on a business activity even though it is supplying services for consideration (lecture fees) and renting out accommodation
- absence of a profit motive does not necessarily mean that there is no business activity
- it is possible for charitable activities to also be business activities
In particular reference to this case, they accepted that:
- the greater part of the Charities activities are charitable
- it charges fees to meet operational expenses and not so as to give rise to profits which points away from economic activity
- the property acquisition was partly funded by donations which would not be the case for a commerial organisation
However, the FTT concluded that:
- the fees received were consideration for the teaching provided despite the lack of profitability and charitable motives; the provision of religious education in return for payment is a business activity
- the temporary lettings were not to anyone connected to the Charity's activities and 'could not be anything other than a business activity' even though there may have been no intention for the arrangements to be continuous or permanent
- that the intention to eventually let rooms to students would also be regarded as a business activity
Comment:
This case is interesting for a number of reasons, not least because the Charity can be considered a little unlucky to be facing this unexpected liability which it has indicated could result in its collapse.
- Firstly, the trustees had taken professional advice and contacted HMRC on two occasions to confirm that the VAT exemption would apply. Unfortunately it would seem that some relevant information was not passed on by the trustees, and that to some extent they had been asking the wrong questions.
This reinforces how important it is when obtaining advice to make sure that all information is provided that could possibly be relevant. If there is more than one intended use for the property, then each one should be considered.
It also reinforces how important it is for advisers to make sure they ask sufficient questions of their clients to be sure of giving correct advice.
- Secondly, the FTT have made their decision by taking into account grounds for argument that were not raised by HMRC at tribunal, such as the fact that the charging of fees for lectures would have been sufficient to count as an activity 'in the furtherance of a business' even without the lettings to third parties. However had those lettings not taken place would HMRC have challenged the transaction?
- Finally, the FTT decided that the Charity were conducting business activities despite conceding that they had no profit motive, were not managed on a commercial basis, and that the primary purpose of all of its activities was charitable. The FTT also referred to the six business tests taken from the Lord Fisher case, accepting that at least three of these were not met. It is becoming ever more difficult to argue that an activity is not a business activity where any consideration at all is charged, even if it is just a token amount which is far less than would be charged by a commercial entity.
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Trustees of the Institute for Orthodox Christian Studies v HMRC [2015] UKFTT TC04622
