Charities' input VAT - Update

Charities' input VAT

HMRC have decided not to appeal the High Court decision in favour of the charity in Church of England Children's Society v HMRC [2005] SWTI 1340.
Church of England Children's Society uses professional fundraisers to secure regular donations from members of the public. People who give at least £5 a month receive a copy of the charity's newsletter three times a year.
The VAT tribunal decided that:

• the fundraisers' fees related to the non-business activity of seeking donations, so the VAT incurred on them was not recoverable;
•  the newsletters were not zero-rated supplies of printed matter. However, they were deemed zero-rated gifts of business assets and input tax on their production and distribution costs was recoverable following the decision of the High Court in CCE v West Herts College [2001] STC 1245.

The charity appealed to the High Court against the first part of the tribunal's decision and HMRC cross-appealed on the second part.
The High Court decided that if funds raised by donation by the charity were used to fund its taxable business activities, it was entitled to recover related input tax. This followed Kretztechnik AG v Finanzamt Linz [Case C-465/03], where the ECJ ruled that, in effect, if the capital-raising transaction is for the purpose of the business's economic activity in general, the transaction has a direct and immediate link with the whole economic activity of the taxable person. VAT on the transaction can be recovered.
The court also upheld the tribunal's decision that the newsletter was a deemed zero-rated supply of printed matter and that input tax on the production and distribution costs could therefore be recovered.
HMRC say that, as a result of the decision, where funds are raised solely for a restricted charitable purpose involving wholly non-business activities, the VAT incurred on raising those funds is not input tax and is not recoverable. However, where the funds raised are used wholly to support the making of business supplies, all of the VAT incurred on fundraising costs can be treated as input tax, depending on whether these business supplies are taxable or exempt.
HMRC say that with regard to deemed supplies, in order for there to be such a supply, the gifted goods must first be business assets. Following changes to the rules on gifts of business assets with effect from 1 October 2003, there is no longer a deemed supply where the total cost of production of newsletters provided to any donor does not exceed £50 in a 12-month period. Where input tax is incurred on business assets that are given away, but those gifts are not deemed supplies, the attribution of the input tax will be based on the business reasons behind making the gifts. Where input tax is incurred on business assets that are given away, and only some of those gifts are deemed supplies, the deemed supplies and the underlying purpose behind making the gifts will be taken into account.
Customs Business Brief 19/2005 dated 7 October 2005

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