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Technical briefing: VAT and grant admission

Finance | 1 Feb 2006

Graham Elliott discusses a grant admission case brought before the Manchester VAT tribunal  

It is relatively common for a charity to administer the passing on of grants given by a provider, such as a government quango. In this situation HMRC generally follows either of the following approaches. If the grants are given into the ownership and control of the administering charity, and the ultimate decision for allocating any grant to other bodies lies with the charity, all of the receipts from the initial funder are deemed to be grants, and outside the scope of VAT.

Where the same broad facts apply, but the ultimate funding body retains the last word on how the grants are distributed, and allows the intermediary charity to retain a certain percentage of the grant to run the operation, the charity is treated as providing services of administering the grant. This is because it does not have ultimate control over the grants so cannot be deemed to have received the funding in its own name. The more obvious recipient of these services is the ultimate funding body, and those services might attract VAT at 17.5 per cent.

It is surprising, therefore, that HMRC decided to take a case against the Birmingham & Solihull Learning Exchange Limited, in the Manchester VAT tribunal, (reference number 19310), on the basis that the services in question were provided to the recipients rather than provider of the grants, which in this case, were learning centres of various types. The tribunal was asked to consider whether the retained 10 per cent of grant revenues constituted consideration for a supply of services to the learning centres. Although the tribunal chairman complained that she was given relatively little information on which to base that decision, she decided that there was very little evidence that any actual service was provided by the appellant organisation to the recipients of the grants themselves. On that basis, she was not willing to say that there was any supply for VAT purposes.

The puzzling aspect is that she was not asked to decide whether any services were made by the appellant to the ultimate funding body, the Learning & Skills Council. Had the tribunal considered this, it may well have concluded that there were services provided in that direction, and this would have conformed to HMRC’s general policy. The decision, perhaps misleadingly, suggests that the above circumstances do not constitute a business activity at all, whereas in fact the decision does not go that far.

Far from clarifying the legal position, this decision gives rise to yet another layer of general confusion. It is a pity that HMRC did not give this issue sufficient consideration from a policy perspective before taking a case on it, and it would be a general improvement if arguments it presents in such cases were consistent with its policy positioning.

Graham Elliott is a partner at haysmacintyre

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