A charity that runs a watersports centre for children has lost a £135,000 VAT case to HM Revenue & Customs in a decision that could have significant implications for the rest of the charity sector.
Longridge on the Thames runs a watersports facility in Marlow, Buckinghamshire. In 2010 it constructed a new training facility.
The charity argued that should not have to pay VAT of £135,000 on the project because the building was used solely for relevant charitable purposes.
HMRC disagreed, saying the activities of Longridge amounted to carrying on economic activity and were not eligible for zero-rating.
Both HMRC and Longridge could not comment before publication of this story.
Longridge successfully appealed HMRC’s decision to the First-tier Tribunal in February 2013 and won a ruling in the Upper Tribunal 18 months later.
Both tribunals considered the wider context in determining whether provision of services for a monetary payment should be considered economic activity for VAT purposes.
But HMRC appealed to the Court of Appeal last year. The court’s ruling, which was released last week, overturned the tribunals’ decisions.
HMRC argued that the test applied by the tribunals was not consistent with EU law.
It said the Court of Justice of the European Union had clarified that the test for economic activity should focus on a direct link between the service the recipient receives and the payment made, as opposed to considering the wider context around the payment.
Therefore, it said, there had to be no direct link between the service and the payment the recipient of the service makes.
The Court of Appeal decided the CJEU test was the correct one and said that the two tribunals "misdirected themselves" in siding with Longridge.
The court also decided that a charitable or a non-profit-making activity can be classed as an economic activity.
Scott Harwood, VAT director at the accountancy firm RSM UK, said the court’s decision could have significant implications for the charity sector.
"For those charities that decided their construction works were in relation to a relevant charitable purpose, or incomes received were simply subsiding a non-business charitable activity, they might need to look again to assess the precise status," he said.
"Newly introduced VAT refund schemes for charities such as hospices might also be put at risk because these rely on the concept of the charity not being in business as a primary prerequisite.
"Ultimately, this could put even more financial pressure on charities by removing essential reliefs and prove a disincentive to collecting contributions to support their charitable work."