A charity that runs a water sports centre for children should have paid VAT on the construction of a new building because it was charging fees for its activities, HM Revenue & Customs will argue in an appeal to be brought in the country’s second most senior court.
The case, which has been running for more than four years, has raised fears that VAT exemptions for a number of charities that charge even small fees for their services could be lost.
The charity, Longridge on the Thames, has run a water sports facility in Marlow, Buckinghamshire, since 2005. In 2010, it constructed a new training facility. It argued that it should not have to pay VAT on the project, which would have amounted to at least £135,000, because it was going to be used solely for charitable purposes, rather than constituting what is known for tax purposes as an economic activity.
HMRC disagreed and attempted to charge the charity the relevant VAT, but in February 2013 the charity won a case brought against the revenue’s decision in the VAT tribunal. HMRC appealed that decision and was again defeated in a judgment of October 2014 in the upper tribunal.
HMRC has lodged an appeal at the Court of Appeal and the case will be heard on 19 and 20 April next year.
Peter Jenkins, a technical adviser to the Charity Tax Group, said: "A win by HMRC would cast doubt on those deserving cases where a charity provides important services on a non-commercial and subsidised basis."
He said that HMRC had previously not considered the fees charged by charities to beneficiaries or users as automatically liable for VAT. In coming to decisions on this issue it had previously taken into account other factors such as the use of volunteers, the extent to which activities are subsidised and the nature of the activity involved.
Jenkins said: "If this casts doubt on relevant charitable purpose status for all bar those that make no charges, we face the prospect of charities being unable to raise even modest funding from charges without incurring a huge VAT cost."
He said he feared that a win for HMRC would lead to it trying to reclaim money from charities that had previously been given VAT relief on construction.
Bill Lewis, a consultant at the law firm Bates Wells Braithwaite, who previously advised Longridge, said he felt HMRC was "in denial about what the law is".
He said: "I’m very disappointed that HMRC has taken this approach. There are a lot of very small organisations that the man and woman in the street would consider are operrating as charities, but which HMRC now says are businesses because they charge a very small rate."
An HMRC spokesman said it could not comment on continuing cases.