The language of VAT – when the VAT welfare exemption is bad news
One of the problems with VAT is that it uses terms that have a rather different meaning than they do with other taxes or just in normal English. Exemption is case in point.
A non VAT specialist hears that service is VAT exempt and thinks that it excellent as it means there is no tax charged. Unfortunately an exemption in VAT terms merely moves when tax sticks and a person making an exempt supply suffers VAT on their costs that they cannot recover.
This is a particular irritant if you are Charity providing welfare services under a contract with a local authority. This is because if the services you provide are taxable rather than exempt then the local authority will likely be able to recover this VAT and on the back of this taxable supply you will be able to recover VAT on your costs. It is not surprising therefore that charities have attempted to charge VAT on services that would normally be seen as exempt welfare.
It is also not surprising that HMRC have attempted to ensure that welfare services are exempt. They are helped in this by the lack of general understanding as to what a VAT exemption does. I recall a budget a few years ago when the Chancellor announced measures to strengthen the VAT exemption for welfare to protect it from this type of challenge to loud cheers from all parties. They presumably didn’t realise they were cheering a measure that ensured welfare services suffered tax.
Making their supply taxable is exactly what a number of midlands YMCA’s attempted to do in respect of housing support contracts with local authorities funded by supporting people money. HMRC disagreed and the matter went to the Tribunal.
The charities argued that their supply was not in fact a single supply to the funding Council but should have been seen as both a supply to the Council and a supply to the recipient of their care – the young person who was being housed. This was rejected and it was found that the supply was being made to the Council. The fact that the Council was not itself a distressed person did not mean that the VAT welfare exemption could not apply – it could. The important thing was that the services concerned person in distress and not that the person legally receiving the supply were themselves distressed.
The Charity also attempted to argue that the services were not to persons that were sufficiently distressed for the services to be welfare. In doing this they quoted HMRC guidance which applies a very strict test and talks of the exemption only applying in cases of severe distress. The Court found that the persons who were helped where sufficiently distressed and commented that perhaps HMRC guidance wasn’t very helpful. I agree. One of the problems any VAT advisor has with the VAT welfare exemption is that the tests in the HMRC notice such as the need for a specialist produced care plan and the recipient being under severe distress restrict the exemption rather more than the law suggests should be the case and HMRC policy applies in practice. It is an area where officers tend to adopt a position that maximises revenue and if exemption does that – as it will if a local authority is a client, then they see exemption. They are not always correct here and can be challenged successfully in some cases. An option that is often ignored is arguing that a welfare type supply should really be subject to the 5% reduced rate as it is more in the nature of being general advice.
This leads to some rather odd results. I can think of at least one common area of funded welfare type work where I am aware of different HMRC Officers giving different organisations contradictory rulings on essentially the same facts. I do hope HMRC consider the judges comments on their notice and consider revising their policy on the welfare exemption so it is more consistent.
The YMCA case can be found here