Many VAT registered businesses have at some point queried whether they can reclaim the VAT on an expense. Sometimes it is a personal or non-business expense and the answer is usually ‘no’. Where those expense costs are directly linked to the provision of goods or services that are subject to VAT (supplies charged at 0%, 5% or 20%) then the answer will usually be ‘yes’.
The starting point with VAT costs is that they are only recoverable to the extent those costs are incurred in the making of taxable supplies. Certain supplies, such as health and welfare are specifically exempt from VAT. Therefore, any VAT costs incurred in the making of exempt supplies are not recoverable, subject to a de minimis test.So what if you could change your exempt supplies into taxable ones and recover all your VAT costs or make a taxable supplies exempt to benefit your customers?
A recent case explored this very question. The business itself is a profit making, limited company which provides day care services for adults with disabilities at various locations. This includes anything from personal assistance to activities, games and help with everyday tasks. The services are carried out in accordance with strict guidelines from the local authority with formal care plans for each attendee being in place.
Contained within the legislation for VAT exemption (Item 9 Group 7 Schedule 9) is the provision of ‘welfare services’ by a ‘charity…, state regulated institution or a public body’. Broadly speaking, charities or those registered with the Care Quality Commission, or public bodies providing welfare services, should supply exempt welfare services. This means that whilst VAT is not charged on ’supplies’ to ’customers’, the business cannot reclaim any VAT incurred on costs.
HM Revenue and Customs (HMRC) argued that the business in this case failed to meet any of the above criteria, ie they are a profit making business, not a charity, state regulated institution or public body, therefore the supplies were subject to VAT. In contrast, the business wanted their supplies to be exempt from VAT as many of their customers were private individuals paying for services with their own funds.Outcome
In what is a lengthy and detailed tribunal report, the Judge found the UK legislation breached the ‘principle of fiscal neutrality’. There is a clear line between charities and businesses. However, when the underlying supplies are the same, he ruled that the VAT position should also be the same. It would be unfair for a charity to make exempt supplies when a business making the same supplies would need to charge VAT.
Equally it would be unfair if a business could structure itself to make those same supplies taxable and therefore benefit from recovering VAT costs. The ruling is based on EU law so may be subject to change in the future or HMRC may wish to appeal to a higher court, but it has a limited window to do so.
The case underlines the fact that even if you position a supply to fall outside of the legislative framework, there is no guarantee that the liability you seek, will actually apply. Here it has been concluded that the deliberately created structure cannot prevent exemption applying to the activities.
If you are interested in further details on this case and its potential implications for your business, please contact Rob Geary
or Liz Hill
on 01603 663300.