All Very Puzzling

VAT Tribunal

All Very Puzzling

RICHARD CURTIS considers business and non-business activities.

WHEN IS VAT input tax not VAT input tax? — when it relates to a 'non-business' activity. As John Price says in Tolley's Tax Essentials 2003-04, 'There are far more organisations whose activities are partly non-business than you might think'. And he goes on to suggest examples of where one might find this business/non-business mix; such as relief of distress charities, colleges and educational establishments, museums, public bodies and churches. In such cases, section 24(5), VAT Act 1994 comes into play: 'VAT on supplies, acquisitions and importations shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax.'

So, if an organisation has both business and non-business activities and the former makes exempt and taxable supplies, apportionment should be made before a 'partial exemption' calculation under section 26, VAT Act 1994 and Regulation 99, et seq. of the VAT Regulations SI 1995 No 2518. The partial exemption calculation then apportions the input tax that does relate to business purposes between exempt and taxable supplies, with only the latter being allowable as a deduction from the output tax liability. So, strictly, there should be a 'two-stage' calculation in such cases:

In reality (e.g. where employees carry out both business and non-business activities from the same office, it can be difficult to identify the non-business VAT and a 'single-stage' calculation may be done based on monetary values. In Whitechapel Art Gallery [1986] STC 156, this approach was rejected as incorrect, but Customs took the view that the decision only applied in the circumstances of that case, i.e. where a gallery had free exhibitions, but also charged for other events, and Customs continued to use single stage calculations elsewhere.

'Elsewhere' included the Hospitality Training Foundation, which was a company limited by guarantee and a registered charity, promoting the education and training of those in the hospitality, travel, tourism and leisure industries. It received income in the form of government and European Union grants ('outside the scope', non-business income), and exempt and standard-rated income. In a letter in 1994, Customs agreed with the Foundation's predecessor (the Hotel and Catering Trading Company Limited) for the use of a 'revised special partial exemption method' for the recovery of input tax. The tribunal found the terminology of the letter rather confusing, but found that it was 'just about clear from the letter' that it related to the partial exemption calculation rather than an apportionment under section 24(5). The method was that deductible input tax should be calculated as follows:

'The total value of taxable supplies [divided by] the total value of taxable and exempt supplies. This ratio should be applied to the total input tax incurred, excluding non-deductible input tax such as business entertainment, etc.'

But although the company, at first, correctly excluded from the calculation the VAT on supplies specifically for the non-business activities, the Foundation that succeeded it did not exclude that VAT or the VAT on a proportion of the overheads that related to such activities. Customs visited the Foundation in August 2000 but, despite the evidence of this error, raised no objection to the fact that overheads were not being apportioned and 'conveyed ... their satisfaction that the Foundation was using the method in the 1994 letter on a proper basis'. It was only at the time of another visit in December 2001 that this mistake was noticed by Customs and, in December 2002, Customs issued assessments for the periods ended December 1999 to June 2002. The Foundation appealed.

The Foundation argued that the 1994 letter specified a single calculation method and it had complied with it. However, the tribunal found that, whilst Customs could agree a calculation method, the method must still determine strict tax rights and liabilities. The letter did not concede a right to deduct input tax relating to non-business purposes.

The Foundation also argued that its method was approved by Customs as a result of their visit in 2000. Customs argued that the treatment used by the Foundation was outside of the scope of any special method and there was no evidence that its officers were aware of it.

The tribunal felt that, during the meeting in 2000, 'the Foundation placed their cards face up on the table' and Customs should have realised what was happening; although it did agree that the VAT legislation did not allow for such treatment and the officers' actions or inactions could not approve it. The tribunal considered that 'the problem would never have arisen if the 1994 letter had been more carefully worded ... the faults are not all on one side'.

The Foundation then argued that the assessments made in December 2002 were out of time before December 2000. Section 73(6), VAT Act 1994 states that the time limits for making assessments are:

The tribunal commented that 'it is well established that the Commissioners will have "sufficient knowledge" when "the last piece of the puzzle has fallen into place"' (Pegasus v Commissioners of Customs and Excise [2000] STC 91). The necessary information must have been available to Customs at the time of the August 2000 visit and this would have enabled the 'puzzle' to have been solved. Assessments for the periods before December 2000 were therefore out of time, but subsequent ones were valid.

(Hospitality Training Foundation (18359).)

Issue: 3974 / Categories: