Charities that stretch their resources by charging those who can afford to pay for their services will be deeply concerned by a Court of Appeal ruling that one such organisation was engaged in ‘economic activity’ for tax purposes.
The charity concerned provided water-based outdoor activities for people of all ages. The charges it levied did not represent the full cost of those services and they were adjusted downwards for those who found it difficult to pay. It was not registered for VAT and thus did not charge VAT on the services it supplied.
After building a new training centre, the charity claimed a £135,000 VAT rebate in respect of construction costs on the basis that they were zero-rated. HM Revenue and Customs (HMRC) disagreed but the charity’s arguments were upheld by the First-tier Tribunal and the Upper Tribunal.
In upholding HMRC’s challenge to those decisions, the Court found in the light of recent binding authority from the European Court of Justice that both tribunals had erred in law. Although the charity was predominantly concerned to meet its charitable objectives, did not seek to make a profit and provided its services for the public benefit, the Court found that it was engaged in an economic activity.
Giving guidance as to the correct legal test to be applied in such cases, the Court noted that the charges paid by users were more than nominal and that the supply of services for consideration on a permanent basis was presumed to be an activity which was economic in nature. It was irrelevant that the charity was non-profit making or that the charges were below the market rate.