The St Paul's Community Project, a charity creche in Birmingham, won a High Court case which established that the building of new nursery facilities should not be subject to VAT.
The case could create a precedent for more charitable activities to be designated 'non-business', and therefore not subject to VAT. Many voluntary organisations would be worse off as a result.
Charities such as St Paul's, which are constructing new buildings that would be VAT-free, would benefit. But others - particularly service provision charities with high expenditure - benefit from being part of the VAT system because they can recover VAT on many services they buy in. If they are designated 'non-business' they will not be able to do this.
The judge ruled that St Paul's, despite charging fees and competing with businesses, was not involved in a business activity and should not be subject to VAT.
Customs said that, although it doesn't agree with the decision, it will not appeal against it. But it remains adamant that charity activities can be subject to VAT, even if there is no profit motive, and that most charities benefit from this policy.
A Customs statement said: "Many charities with activities not motivated by profit, and whose fees are subsidised by public funds or donations, benefit from such activities being business for VAT purposes, because they are able to recover VAT incurred in relation to those activities. It would not be beneficial for the sector as a whole if charitable activities were all regarded as non-business, as it would deny them recovery of input tax."
Customs accepted that charity creche facilities will be considered 'non-business', but all other charitable activities will be subject to a business test. But Peter Ladanyi, charity VAT manager at accountants Chantrey Vellacott, said distinguishing between creche charities and other charities is "not very sustainable".
"This is a case with potentially wider ramifications," he said. "The business test is fundamental to determining both VAT payments and recovery.
If there is uncertainty over the business test, then there must inevitably be uncertainty over the VAT treatment of charities."
- St Paul's Community Project won a case which established that building new nursery facilities should not be subject to VAT as the work is classed as 'non-business'
- Service provision charities would particularly suffer from this ruling, because they would not be able to recover VAT on any such activity
- A Customs & Excise statement said that regarding all charitable activities as 'non-business' would not benefit the sector
- A standard business test has been introduced to determine whether or not charitable activities should be classed as 'non-business'.