The VAT tribunal has just decided a case concerning 4 Student Unions – Loughborough, Keele, Nottingham and Bournemouth. It is an interesting read for any charity as it considers the scope of the VAT fundraising exemption.

The case was essentially concerned with whether the student unions were correct in treating income from special events such as student union balls as VAT exempt, rather than subject to VAT as would be the case with their normal events. The special events varied but were distinguished from routine trading by the fact they were promoted as fundraisers and usually on a larger scale. Thus a student union might offer bars and paid admission club nights all year round, but but a few times a year would offer a larger event such as a Freshers Ball.

Although the events were promoted differently – as fundraisers, the difference between the normal trading activities and special events was scale more than anything else. In all cases they appear to involve the provision of entertainment and the opportunity to buy drink. In all cases except one the Tribunal found that this wasn’t that far removed from what they did normally and they were not special events organised with the main purpose of raising funds. 

What is a Fundrasing Event for VAT ?

This was an important finding as the most important question the Court had to consider was what constituted a fundraising event. The conclusion reached was that it had to be something that was rather different from normal trading and designed to raise funds. The Unions normal trading activity consisted of providing entertainment and drink. It was not possible for them, by just a fundraising note on a poster, to treat a few larger events differently for VAT. The exception was an event held by Bournemouth University which was felt to be different from that student unions normal offering and could be seem to be a fundraising event.

What is Distortion of Competition ?

Unfortunately for Bournemouth, although it was accepted to be a fundraising event, the UK legislation states that the exemption does not apply to any supply ‘the exemption of which would be likely to create distortion of competition such as to place a commercial enterprise carried on by a taxable person at a disadvantage’. The Court decided that the Bournemouth event was in such competition and therefore the exemption didn’t apply.

In deciding what constituted competition the Court applied the approach that had been used before by the Upper VAT Tribunal when considering the earlier Loughborough Student Union appeal on the same subject . The test to be applied was that used by the European Court when it considered a case concerning parking in the Isle of Wight. Here, whether the Isle of Wight Council was in competition determined whether it could treat the parking it offered as VAT free. The competition test was found to be not just whether there was actual competition but whether there was potential competition – was the prospect of a private operator entering the market and competing real and not just hypothetical. 

In the case of Bournemouth it was found that following the first years successful event there were various commercial competitors and therefore the competition was not only potential but actual. 

If a Charity reads through the HMRC checklist that helps them decide if their event qualifies for the fundraising exemption  (Fundrasing Notice Para 6) they will not see any mention of the competition disqualification. Yet HMRC do mention it elsewhere in their guidance where they state that they will only use this measure when either the exemption is likely to distort the market or there is significant and systematic evidence of commercial distortion. (para 3.13). In practice, the reason its not on the checklist is because its very rarely used.

Ever since the Isle of Wight case I have had a concern over this competition test in a charity context . The exemption applies, by definition, to events where a charity makes a charge for something.  If that something being provided is attractive enough for a Charity to sell it then somewhere there will be a potential commercial competitor. Try and think of a charity fundraising event where you cannot buy something similar from a commercial concern. Charity fundraising dinners – lots of commercial competition here. Charity challenge events or walks – there are a number of private operators in this market. Auctions – dozens. 

My fear is that if you were to strictly apply the test that to be exempt a charity organised event can have no potential or actual commercial competitors then the exemption would almost never apply. It would be the VAT equivalent of one of those humorous signs you find in pubs that state no credit unless you are over 80 and accompanied by both parents. Possible but rather unlikely.

This case does not mean that I expect HMRC to seek to limit the VAT fundraising exemption so that it applies to virtually nothing.  But it would worry me if they potentially could. If they are always able to fall back on the competition disqualification come an appeal then the exemption is effectively in their gift.  If this case does go further I rather hope that this point is clarified. Perhaps in practice a charity fundraising dinner or auction is different from a commercial event as clients gain an additional benefit from it being a fundraiser. In which case they are not normally in competition.

The Advertising Restriction is Wrong

A further point that the Court considered was whether the test in the UK legislation that requires a fundraising event to be advertised as such for the exemption to apply was compatible with EU law. It found that it wasn’t and this clause should be ignored. This is potentially good news for any charities that have had HMRC refuse exemption for what was otherwise clearly a fundraising event. Although in practice, I suspect there will be relatively few examples of this, as the fact an event is a fundraiser is a selling point and means there is normally a good commercial reason for stressing the fact.

As it stands this is a First Tier Tribunal case that takes a slightly more restrictive view of what is meant by a fundraising event than some other first tier cases but is not unique.  Neither is its reliance on the Isle of Wight competition test groundbreaking.  Its view that the advertisement clause in the UK legislation is incompatible with EU law is a helpful development and it will be interesting to see if HMRC come to accept this. But it provides an interesting summary of the issues that surround the fundraising exemption and is worth a read. See Tribunal Decision

As a case concerning such important points it will be interesting to see if this is the first stage of an extended litigation. Although any appeal will surely take place after March and quite what the status of EU VAT law will be going forward then is anyones guess.