Grant Funding: Business or Non-business?
Colchester Institute Corporation has recently been successful in its argument that its grant funded education was not non-business income but amounted to consideration for an exempt supply of educational services. This article looks at the potential implications of the case. The full case script is available here.
Who does this affect?
This is of most relevance to educational institutions that provide grant funded education but some concepts will apply to other charities that obtain grant funding.
The issue and decision
The case revolved around a claim made by Colchester Institute for overpaid VAT. However, the wider issue for charities that receive grant funding is the VAT treatment applicable to grant funding that until now would have been treated as ‘non-business’ as not being treated as consideration for a supply of services (a ‘business’ activity).
Why does this matter?
This is an Upper Tier Tribunal decision that carries judicial precedent and could potentially lead to HMRC changing its interpretation on the VAT treatment of grant funding.
The decision could lead to a number of potential problems, including:
- Zero-rate on Relevant Charitable Purpose Buildings - buildings that are used wholly for the purposes of provision of non-business activities have had the advantage of being zero-rated. If HMRC consider that certain grant funded activities now constitute exempt supplies of services, this relief will no longer be available in those instances. Following this technical point through, it is also possible that HMRC could seek for VAT to be applied under self-supply rules on such buildings that have been constructed in the last ten years.
- VAT recovery – Institutions such as Academies are permitted VAT recovery for their grant funded ‘non-business’ educational activities. If some of the grant funding received is now to be treated as exempt this will reduce the VAT recovery of Academies.
- Reduced-rate on fuel and power – where qualifying (i.e. non-business) use is in excess of 60% of total use, the supply qualifies for 5% VAT rather than the standard rate. Applying this decision could mean that certain organisations are no longer able to claim relief.
What now?
It must be noted that this decision is the result of an attempt to seek a VAT windfall for the taxpayer and the arguments, which go against HMRC’s published guidance, were taken in order for HMRC not to repay a substantial amount of overpaid output tax. Therefore, it is possible that HMRC will only use these arguments in similar circumstances. Ultimately, we will need to wait for HMRC’s guidance following the decision. However, charities should be aware of the potential consequences because even if HMRC does not change its policy the VAT Tribunal will need to accommodate the decision made for cases with similar fact patterns.
Please get in touch with Rob Warne, Kieran Smith or your usual VAT contact if you would like to discuss this further.
