Finance: VAT exemption rulings 'create confusion' for voluntary sector

Charity VAT experts claim that two recent high court rulings have failed to resolve the continuing dispute between arts organisations and the tax man.

Last month, Bournemouth Symphony Orchestra lost its appeal against a judgement that it could not reclaim VAT on ticket sales (Third Sector, 18 October). According to the judges, the fact that a salaried managing director had voting rights on the trustee board meant that the orchestra did not comply with HM Revenue & Customs rules stating that an organisation must be managed on an 'essentially voluntary basis' if it is to qualify as VAT-exempt.

In the same week, Longborough Festival Opera fended off an appeal lodged by HMRC, which had argued that Longborough should lose its VAT exemption after one of its voluntary directors agreed to guarantee a production of Wagner's Ring Cycle. HMRC objected on the grounds that personal liability gave the director a financial interest (Third Sector, 18 October).

"These decisions create confusion for the sector," said Steve Hodgetts, VAT partner at accounting firm Baker Tilly. "Other cultural bodies have been successful in applying the VAT exemption where a minority of trustees have received some financial benefit. There exists no clear definition of 'essentially voluntary'."

He added: "I don't know where the dividing line is between professionally managed and 'voluntarily managed'. This has not been defined because the court has not told us where the line is drawn. The only option for charities is to liaise with HMRC, because the consequences of getting the rules wrong are so serious."

Kevin Woolridge, senior VAT manager at accountancy firm Kingston Smith, said there were contradictions in the Bournemouth Symphony Orchestra case.

"The ruling is 33 pages long and gives three different angles, so it is not clear," he said. "The judges do contradict each other at times."

HMRC said it had no plans to issue further guidance on the definition of 'essentially voluntary'. Asked how much a board member would have to be paid to invalidate an arts body's VAT-exemption, an HMRC spokesman said the figure would be in line with a "commercial rate of pay".

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