back to basics – vat & public bodies vat and public bodies · pdf file ·...
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20 THE TAX JOURNAL Monday, 29 June 2009
BACK TO BASICS – VAT & PUBLIC BODIES
Is the public body acting in the course or furtherance of a business?As discussed above, the key issue in terms
of charging VAT (and to a lesser extent in
the recovery of input tax) is deciding to
what extent, if at all, a public body carries
out activities ‘in the course or furtherance
of a business’.
EU legislation provides that ‘States,
regional and local government authorities
and other bodies governed by public law
shall not be regarded as taxable persons
[that is, they do not have to charge VAT]
in respect of the activities or transactions
in which they engage as public authorities,
even where they collect dues, fees,
contributions or payments in connection
with those activities or transactions’ (EU
VAT Directive 2006/112/EC, Article
13(1)).
This does not provide a general carve
out for public bodies from the VAT regime
but does provide that to the extent they
are carrying out statutory functions they
do not have to charge VAT. In the UK
rather than referring to the bodies not
being taxable persons in respect of the
relevant activities, we tend to refer to
these activities as being ‘non-business’
activities.
Which bodies qualify as public bodies?HMRC takes the view that to qualify as
a public body, the body in question must
be acting under a special legal regime
applicable to bodies governed by public law.
HMRC reviewed its guidance on the
concept of a ‘public body’ for the purposes
of Article 13(1) in 2008, in response to
an increasing number of ‘quasi-public’
bodies arguing that they fell within the
definition. The updated guidance, reacting
to cases brought by two educational bodies
in particular, states that a body will only be
a public body for these purposes if ‘it is a
public sector body which forms a part of
the UK’s public administration, such as a
government department, a local authority
or a non-departmental public body. Article
13(1) is not intended to enable other
bodies to claim special treatment merely
because they have delegated powers, are
regulated in some way by the State, are
funded by public money or are subject
to certain specific rules in the pursuit of
their activities.’
What activities are covered by these provisions?The general rule in Article 13(1) only
applies to the statutory functions
undertaken by a public body. There is a
significant amount of guidance and case
law as to which activities will be treated
as non-business and which will not.
In addition there are several activities
specifically excluded from the ambit of
Article 13(1). First, Article 13(1) carves out
certain activities from its application unless
they are carried out on such a scale as to
be negligible, these include the supply of
utilities such as gas and electricity, supplies
of telecommunications and supplies of
transport. In addition the Treasury provides
a list pursuant to VATA 1994, s 41(2) of
supplies (similar to those provided by
private enterprise) which when made by
government departments will be treated
as made in the course or furtherance of
a business. The list was published in the
London Gazette on 7 June 2002.
VAT a n d Pu b lic
Bo d ie sContinuing our series of basic, informative articles, Liz Morgan, Partner, and Jon Robinson, Solicitor, Pinsent Masons LLP explain how VAT applies to certain public bodies
In this ‘back to basics’ article we
consider the VAT issues relevant
to public bodies, in particular local
authorities and government departments.
B efore we do that, however, it is worth
reminding ourselves of some fundamental
rules governing the charging and recovery
of VAT.
The starting point is that VAT is
charged on a taxable supply of goods or
services in the UK, where that supply is
made by a taxable person in the course or
furtherance of a business.
In general these same principles
apply to a public body as they do to a
commercial enterprise. However, some
of the concepts can be more difficult
to apply to public bodies. In particular
the concept of a supply made ‘in the
course or furtherance of a business’
is straightforward in the case of most
commercial parties but it raises some
interesting questions when one is
considering public bodies.
The other side of the VAT coin is the
question of recovery of input tax. In
order to recover input tax, the recipient
of the supply must be a taxable person
and the supplies giving rise to the input
tax must be attributable to taxable
supplies made by him in the course or
furtherance of his business. Input tax
attributable to exempt supplies or non-
business activities cannot therefore be
recovered. This could present problems
for public bodies, as they will be making
significant non-business supplies.
However, in order to address this and
prevent VAT being an absolute cost,
special rules apply to public bodies to
allow them to recover VAT which would
not be recoverable under these general
principles.
The starting point is that VAT is charged on a taxable supply of goods or services in the U K , where that supply is made by a taxable person in the course or furtherance of a business
Monday, 29 June 2009 THE TAX JOURNAL 21
BACK TO BASICS – VAT & PUBLIC BODIES
Finally, supplies will not be treated as
being non-business where treating them as
such would lead to significant distortions
of competition.
The issue of public bodies and
distortions of competition has recently
been considered, both in the UK courts and
the European Court of Justice, in H M R C
v I s le of W ig h t C ou nc il and oth er s [2008]
STC 2964, ECJ and [2009] All ER (D)
125 , which concerned a local-authority-
operated car park. The ECJ was of the view
that ‘would lead to’ includes both actual
and potential competition with a private
operator, provided that the possibility of a
private operator entering the market is real.
The ECJ further ruled that ‘significant’
distortions of competition means ‘more
than negligible’. Car-parking provides a
useful example of how these rules will
be applied. The provision of on-street
parking which is a statutory function
carried out only by local authorities will
be a non-business activity, whereas the
provision of off-street parking where there
is competition from private operators will
be a business activity.
It is worth noting that just because
particular services are subject to
contracting out by the local authority,
so a private business is involved in the
provision of the services, it does not
make the supply by the local authority
one which is the subject of competition
from private businesses and hence subject
to VAT. It is important to distinguish
between the supply by the private operator
to the local authority and the supply by
the local authority to the public. There is
particular guidance in a number of areas
on the VAT treatment of contracted out
services including in the catering sector
and the provision of leisure facilities.
W here supplies are made by a public
body in the course or furtherance of a
business then, subject to very limited
exceptions, the normal rules will apply to
determine whether the supply is standard-
rated, z ero-rated or exempt.
R ecovery of input taxW ithout special rules recovery of input
tax could be a real problem for public
bodies because input tax attributable to
their non-business activities would not be
recoverable. However, the normal rules for
recovery of input tax are varied for certain
public bodies.
W hen looking at recovery of input tax
public bodies can be divided into three
categories:
bodies falling within VATA 1994, s 33,
which covers local authorities and certain
others, including passenger transport
authorities, police authorities, development
corporations and the B B C
government departments and other
Crown bodies, including health service
bodies, which are governed by s 41
public bodies which fall within neither
of the above sections. The recovery of input
tax for these bodies is governed by general
principles.
S ection 3 3 bodiesSection 33(1) provides for a special
recovery regime which means that most
bodies falling in its ambit will be in a
position to recover all input tax. The
scheme only applies to input tax which
is attributable to non-business activities.
It applies whether or not the authority
is registered for VAT or makes taxable
supplies.
In addition to this refund scheme, local
authorities also have a particular recovery
position under s 33(2) in respect of input tax
attributable to VAT-exempt activities, which
differs from the normal partial exemption
rules. L ocal authorities can recover input
tax attributable to VAT-exempt activities
but only if this input tax is an ‘insignificant
proportion’ of the total input tax incurred by
the authority in any year.
HMRC takes the view that an
‘insignificant proportion’ means that the
input tax attributable to exempt supplies
must be less than 5 % of the total input tax
incurred on all purchases (or not more than
£ 625 per month and less than 5 0% of the
total input tax incurred, if greater).
In calculating the amount of input
tax relating to exempt activities, a local
authority must include both input tax
directly attributable to exempt activities and
an appropriate proportion of its ‘overhead’
VAT.
If the result of the calculation is that
input tax attributable to VAT-exempt
activities falls within the limits set out
above, all of it is recoverable. If the limits
are exceeded, none of it is recoverable. This
‘5 % test’ is therefore extremely important
for local authorities.
The 5 % test can give rise to problems,
especially where a local authority is
carrying out significant redevelopment
projects which may involve substantial
exempt supplies. As a result it is currently
subject to review. W hile the review is going
on HMRC has announced a moratorium
on the application of the 5 % threshold.
However, the moratorium is only being
granted on a year-by-year basis, which is
providing significant uncertainty for local
authorities in planning for future years.
L iz M organ Jon R obinson
W ithout special rules recovery of input tax could be a real problem for public bodies because input tax attributable to their non-business activities would not be recoverable. H owever, the normal rules for recovery of input tax are varied for certain public bodies
22 THE TAX JOURNAL Monday, 29 June 2009
BACK TO BASICS – VAT & PUBLIC BODIES
G overnm ent departm entsA separate input tax refund mechanism
exists under s 41, which al lows
government departments and health
authority bodies to recover certain input
tax attributable to supplies received by
them for non-business activities. This
is a less generous mechanism than that
which applies to bodies governed by s 33
and is principally intended to encourage
outsourcing of functions by these bodies
by removing the VAT charge which would
otherwise arise.
The bodies which qualify for the
scheme and the eligible goods and
services are listed in a Direction published
by HM Treasury. The most recent list was
published in the London Gazette on 10
January 2003.
In other respects the input tax recovery
position of government departments is
the same as for other businesses.
G rantsO ne common issue which can arise
in the context of public bodies is the
VAT treatment of grants. The definition
of supply for VAT purposes is very
wide. A supply is anything done for a
consideration.
W here a public body provides a grant
to another body it is always important to
consider whether it is genuinely a grant
(which will not be treated as consideration
for any supply and therefore not subject
to VAT), or whether it should be treated
as consideration for a supply.
HMRC guidance makes it clear that
just because conditions are attached to
the grant to make sure it is being used
for its intended purpose, this will not
mean it will be treated as consideration
for a supply. However, where it is a
condition of the grant that the public
body or any third party receives anything
in return for the grant, it should properly
be treated as consideration for a supply.
Any grant funding arrangements need
to be carefully reviewed, because the
distinction is not always an easy one.
R egistration for V A TThe normal registration rules apply
to public bodies other than local
authorities. However, special rules apply
to local authorities. If a local authority
makes taxable supplies in the course or
furtherance of a business, it must register
for and charge VAT whatever the value
of the supplies pursuant to VATA 1994,
s 42.
C onclusionIn conclusion, the application of the VAT
rules to public bodies is by no means
straightforward, which is demonstrated
by the amount of case law in this area.
Difficult issues arise both in terms of
when they have to charge VAT and
also on their ability to recover VAT on
services provided to them, which means
that public bodies need to consider VAT
in whatever they are undertaking.
L iz Morgan can be contacted on e-mail:
L iz .Morgan@ pinsentmasons.com and
tel: 020 7418 8218. Jon Robinson
can be contacted on Jon.Robinson@
pinsentmasons.com and tel: 0113 368
65 70.
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