Welcome news could be on its way to charities if the First-Tier Tax Tribunal agrees that the present UK law regarding charity VAT exemption is to be declared invalid.
The ruling serves as an important reminder for all charities that hold events such as annual balls to ensure they are meeting the strict conditions for the event to qualify as exempt from VAT - so that VAT does not have to be paid on ticket prices.
We highlight below what the decision will entail considering issues with the requirements for VAT exemption under UK law and the impact of EU law restrictions.
Currently the UK rule governing fund-raising VAT exemptions is constructed narrowly and available only to charity events that satisfy the conditions; that the event needs to be for the:
- Primary purpose of raising money, and
- To be promoted as being primarily to raise money
The cultural exemption applies to admission to theatrical, musical or choreographic performance of a cultural nature when the organisation is run on a voluntary basis.
The UK fund-raising exemption has been faced with a possible compatibility issue with EU law in the recent case of Loughborough Students’ Union (“the Union”) v Revenue and Customs Commissioner (“HMRC”).
The Loughborough Student’s Union v HMRC
The Loughborough Student’s Union is a charity registered for VAT purposes, organising events such as balls for which it charged admission. The Union originally accounted for VAT on the admission prices and then claimed repayment of the VAT on the basis that the supplies were exempt from VAT under either the cultural exemption rule or the fund-raising exemption. HMRC refused to make payment on the basis that the Union had not satisfied either condition.
On 8 May 2012, the First-Tier Tribunal dismissed the appeal on the basis that neither condition of the cultural exemption were satisfied - as the Union was not managed on a voluntary basis as it had paid student officers. Similarly, the events held at the Union did not have a primary purpose of raising money nor promoted as being primarily to raise money, and on this basis, it was declared that the UK fund raising rule did not apply.
On appeal to the Upper Tribunal on 21 October 2013 - although it was decided that the cultural exemption did not apply, the issues of compatibility of the fund-raising exemption with EU law have been remitted to the First-Tier Tribunal.
What this means
It is now a possibility that the UK fund-raising exemption is too restrictive. The Tribunal could decide that the requirements for exemption under UK law are contrary to EU law and declare the restrictions as invalid - this decision could enable charities to use this exemption from VAT more freely so that charities did not have to account for VAT on admission prices to fund raising events.
We will be following the next decision of the Tax Tribunal in the case with interest.
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