Tribunal throws VAT concerns into confusion

Run-ins between the charity sector and HM Revenue & Customs are not new, especially over VAT. But a tribunal case that involved the environmental campaigning group Friends of the Earth could pose serious questions for charities about how they treat money donated to them.

The case centred on the Friends of the Earth magazine Earthmatters, which donors who pay £3 a month or more receive. FoE claimed its donors had provided money in exchange for membership and their membership had certain benefits, including the provision of Earthmatters. As magazines and printed materials are zero-rated, they could therefore reclaim VAT on costs related to the benefits provided. In this case, it sought to reclaim more than £1m in VAT from the training and recruitment of street fundraisers between May 2009 and May 2014.

But the tribunal dismissed FoE's claim, said the payments were donations and ruled in favour of HMRC. FoE described the tribunal's verdict as "disappointing and confusing" and said it had acted in line with HMRC guidance and standard charity practice.

The case was held in the lower-tier tribunal and does not set a binding legal precedent, but if FoE appeals the case it will be heard in an upper-tier tribunal, which would create case law.

There are mixed views on how far the decision will affect other charitable bodies: some say the case should be viewed in isolation; others say there are ramifications for charities engaging in similar practices.

John Rainsford, associate VAT director at the financial advisory company Smith & Williamson, says the ruling is "clearly unhelpful" for the sector. But David Wilson, VAT associate director at the chartered accountancy firm RSM UK, says charities and organisations with similar arrangements should not be unduly concerned and each case should be looked at on its own merits.

"One size does not fit all, so although transactions might look very similar, when you get into the detail there are invariably some differences between one practice or another," Wilson says. He adds that a charity should consider two questions when deciding whether the money it receives is a membership fee or a donation: is a benefit provided? If so, is the benefit specifically provided in exchange for the money given? If the answer to those two questions is "yes", they might be eligible for tax recovery.

Robert Warne, partner and head of VAT at the accountancy firm Crowe Clark Whitehill, says charities with policies similar to those of FoE should emphasise that people are signing up for membership rather than making donations. Benefits cannot be "thrown in at the end of the sell", but must be a central part of the pitch, he says.

Geraint Lewis, VAT principal at the accountancy firm Kingston Smith, says many charities with long-standing arrangements that were never previously questioned "might well now be reviewed and reopened by HMRC" because of this.

But he says HMRC is concerned about charities treating money provided from the public as donations when seeking accounting advantages or Gift Aid, but then declaring them to be membership fees when VAT is at stake.

"I think HMRC's concern was that the charity sector was perhaps, in its eyes, cherry picking and choosing the treatment that was most beneficial to it for a particular accounting or tax purpose," says Lewis. "If you try to treat something as a donation for accounting purposes, it seems illogical to then treat it as something else for VAT purposes."

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