It is just over fours years since HMRC announced a change to their policy on VAT exemption for voluntary organisations following the London Zoo decision.

Since then, VAT exemption has produced a mixture of winners and losers as well as creating much confusion over how the law should be interpreted. MIKE WHITTALL, director of The VAT Group Ltd, has set out below a summary of developments in the key areas in the form of frequently asked questions.
 

How do I know whether my organisation is an ‘eligible body’?

To recap, an eligible body is one which (i) applies all its profits to its cultural activity and (ii) is managed and administered on a voluntary basis by persons who have no financial interest in its activities. The London Zoo decision told us in 2002 that it is only those persons who make higher decisions of ‘last resort’ who must have no financial interest and that paying a normal salary to ‘day to day’ managers does not usually prevent eligible body status.

In a more recent case, Bournemouth Orchestras was denied eligible body status because it was said that part of the managing director’s role, for which he is paid, is to participate in the organisation’s decision making. This meant it is not managed on a voluntary basis. In a contrasting case, Longborough Festival Opera was granted eligible body status even though one of its board members provided a personal guarantee against financial losses.

These decisions demonstrate that HMRC and the courts are prepared to make fine distinctions depending on the precise facts. This does, however, provide a degree of latitude for organisations to arrange their affairs either to satisfy or fail the conditions for eligible body status, whichever is most beneficial.
 

Are all admissions by an ‘eligible body’ exempt from VAT?

The short answer to this question is no. VAT exemption only applies to those activities specified in the law. Here, HMRC appear to follow the definitions tightly. For example, it was ruled in the Chichester Cinema case that film presentations do not to fall within the exemption because they are not strictly live performances. In Trebah Gardens Trust, the VAT Tribunal agreed that an ornamental garden was of historical interest but found that was not in fact a museum.

Some aspects, e.g. whether there is a live performance, may be more obvious. However, there is ultimately a degree of judgement when it comes to other factors. As with eligible body status, it is always best to seek advice and possibly a ruling if you are in doubt.
 

If I am an eligible body, how much VAT can I claim on my costs?

You can only claim VAT on expenditure to the extent that your income is VATable. This means that eligible bodies usually face some restriction on claiming VAT because their admission income is VAT exempt.

With theatres, HMRC have historically taken the view that VAT cannot be claimed on production expenditure because it relates wholly to exempt admission income. However, this reasoning is no longer sound following the Mayflower Theatre Trust appeal which found that the costs of their theatre productions related to both ticket income and programme sales. While HMRC are likely to continue resisting claims they regard as excessive, the point here is that there should be scope for increased VAT claims following this decision and organisations should review their position.
 

Will I gain from being an eligible body?

Deficit funded bodies with little admission income tend to lose out as an eligible body because they face a large restriction on the amount of VAT they can claim as compared with the benefit of not having to pay VAT on their income. By contrast, organisations whose main or sole source of income is admission charges will normally be net winners. Planning a large construction or refurbishment project can, however, put a different slant on either scenario.

The benefit or otherwise of being an eligible body will depend on individual circumstances so it is always important to review your own position carefully. This may involve revisiting previous decisions if your circumstances have changed or if you are planning a major project.
 

What about retrospective claims?

Retrospective VAT claims are normally restricted to the last 3 years. However, the recent House of Lords decisions in Conde Nast and Fleming have challenged the legal basis of this restriction. At the time of printing, HMRC have yet to publish their position but it is expected that they will be forced to accept unrestricted claims for periods prior to 1996 (when the restriction came into being). There is however likely to be a time limit for such claims so organisations should review their position now and submit claims as soon as possible.
 

Where are we now?

HMRC’s interpretation of the law has evolved since 2003 but it is still fairly restrictive. They also tend now to handle disputes centrally rather than at a local level which can extend the timescales involved. Further litigation is likely to be on the way which it is hoped will provide some clarification on the above points.

On the brighter side, there remains scope for organisations to arrange their affairs to make best use of the rules and also to put in claims to rectify the past. The message is to review your position and seek expert advice in cases of doubt.
 

Mike is happy to offer HI-Arts readers based in the Highlands and Islands of Scotland a consultation free of charge up to an hour in relation to the above. He can be contacted on 01466 780800 or mike@thevatgroup.co.uk.

© The VAT Group Ltd, February 2008