First-tier Tribunal (Tax)

[2010] UKFTT 426 (TC)

TC00691

Appeal number:TC/2010/00148

 Zero-rating; VAT on sales of donated items; Charities Acts 1993 and 2006; definition of “charity”; charitable status; section 30 VATA 1994 (Group 15, item 1 of Schedule 8); Public Notice 701/1

FIRST-TIER TRIBUNAL

TAX (VAT)

FURNITURE FINDERS OF WINSFORD LTD Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Judge: CHRISTOPHER HACKING

Member: Mr A W HOLDEN

Sitting in public at Alexandra House, The Parsonage, Manchester on 6^th August 2010

Mr Gary Cliffe and Miss Dina Smith directors of and for the Appellant

Richard Chapman of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This was an appeal against a decision on review notified by letter dated 11 November 2009 from the Respondents to the Appellant refusing zero rating of Value Added Tax (VAT) under section 30 and the material provisions of Group 15, Item 1 of Schedule 8 of the Value Added Tax Act 1994 (VATA) in respect of sales of goods donated to the Appellant. By virtue of those provisions the sale by a charity of any goods donated to it for that purpose is liable to VAT at the zero rate.

2.       The Appellant is a company whose liability is limited by guarantee. It operates as a social enterprise selling donated furniture, furnishings and electrical items generally, but not exclusively, to persons in need.

3.       The Appellant is registered for the purposes of VAT with effect from 1 January 2006 under VAT registration number 807 9275 04.

4.       Following a visit to the Appellant’s premises on 27 May 2008 by an officer of the Respondents it became apparent that the Appellant had been treating sales of donated goods as zero-rated. On questioning this treatment the Appellant claimed that it qualified for charitable status despite the fact that it was not registered as a charity under the Charities Act 1993 (as amended). The Appellant had claimed that it had been given charitable status for Corporation Tax purposes but an examination of its Corporation Tax returns did not disclose any claim to charitable exemption.

5.       The Appellant in correspondence with the Respondents further contended that it ought properly to be treated as a charity as its aims were charitable and in support of this contention it submitted to the Respondents examples of its treatment as an organisation with charitable aims by bodies including the Big Lottery Fund, Cheshire Waste Partnership, Cheshire Furniture Reuse Forum and the local authority.

6.       By way of appeal against the Respondents’ decision refusing zero-rating the Appellant served a notice of appeal dated 7 December 2009 including as grounds for the appeal the following statement:

“Furniture Finders is an organisation with charitable aims with a company structure, memorandum of association, activities and the understanding and support of all other partners that indicates this is undeniably the case. Therefore HMRC should accept the evidence provided to indicate they could have “charitable status” as agreed with HMRC. The fact that Furniture Finders is not a regulated charity at law does not mean that HMRC cannot still deem the organisation has “charitable status” if all other facts lead to this conclusion.”

7. The notice of appeal states that the above position is “backed up” by the wording in VAT (public) notice 701/1 (Charities May 2004) which states:

“ 2.2 Proof of charitable status

There is no distinction for VAT purposes between those charities that are registered with one of the charity regulators and those that are not. However, charities that are not registered with a regulator who want to claim VAT relief may need to demonstrate to Customs that they have ‘charitable status’ through recognition of that charitable status by the Inland Revenue.

Most charities in England and Wales are registered with the Charities Commission which confirms their charitable status. However some charities are not required to be registered: some are exempted by statute, such as universities: others are excepted because they are too small. In the case of a charity not registered with the Charity Commission, recognition of charitable status by the Inland Revenue is sufficient proof”

8.  The Appellant further contends that its understanding of the position concerning entitlement to zero-rating is common within the furniture re-use sector and has been for many years. It says that a major accounting firm when providing advice to the Big Lottery on this specific topic included the following statement in a fact sheet:

“Companies limited by guarantee with no share capital are treated the same as Charities by Customs”

On the basis of the public notice and guided by the above advice from a leading accounting firm the Appellant argues that it was reasonable for it to have concluded that it was properly entitled to treat its sales of donated furniture and other items as zero-rated for VAT purposes.

9. It is the Respondents’ primary case that the Appellant is neither a charity nor a body having exclusively charitable purposes but exempted from registration as a charity and as such it is not entitled to be zero-rated for VAT purposes by virtue of section 30 and the material provisions of Group 15, item 1 of Schedule 8 of the VAT Act. In relation to the public notice the Respondents say in their Statement of Case that the reference in the notice to there being no distinction for VAT purposes between registered and non registered charities (emphasis added by the Respondents in their Statement of Case) refers only to the distinction between those bodies which are required to be registered with the Charities Commission and those which are not by virtue of section 3A(2) Charities Act 1993. In either case the body must be able to satisfy the Charity Commissioners that it falls within the definition of a charity. The Respondents in their Statement of Case state that they do not claim any power to convey charitable status upon an institution or to “deem” an institution to be a charity if it is not in law a charity.

10. The Respondents contend that the Appellant would not in any event qualify for registration by the Charity Commissioners as a charity as neither its Memorandum of Association nor its trading activities are exclusively referable to charitable purposes.

11.  The term “charity” is not defined in the VATA. It falls therefore to be construed by reference to the definition in the Charities Act 2006 which states

“1 Meaning of “charity”

(1) for the purpose of the law of England and Wales, “charity” means an institution which –

(a)  is established for charitable purposes only, and

(b)  falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities

(2) The definition of “charity” in subsection (1) does not apply for the purposes of an enactment if a different definition of that term applies by virtue of that or any other enactment

Section 2 of the act sets out the meaning of “charitable purpose”. Such purposes are those which are for the public benefit and include such as the prevention or relief of poverty, the advancement of citizenship or community development, the relief of those in need by reason of youth, age, ill health, disability, financial hardship or other disadvantage. This is not an exclusive list but the purposes listed above are those extracted from the list in Section 2 which could reasonably be said to relate to the Appellant’s activities.

12. Mr Chapman contended that the Appellant was not a charity as its purposes were not exclusively charitable. Whilst it was the Appellant’s aim to provide low cost furniture and other goods to those of limited means it was quite possible that those whose means were not so limited might equally avail themselves of the benefits of the Appellant’s activities. The Appellant’s Memorandum of Association did not limit the company’s activities to exclusively charitable purposes and on that account too it was not likely that the company as presently constituted would be able to register as a charity. In support of these contentions Mr Chapman referred to the cases of Jeanfield Swifts Football Club v HMRC (a Scottish tribunal case no 20689 dated 19 May 2008) and Attorney General of the Cayman Islands and others v Wahr-Hansen [2002]3 AER Neither case was directly on point but they did illustrate the limitations of claims to charitable status where the activities of an organisation or its objects as defined in its Memorandum of Association were not exclusively charitable. Mr Chapman also took the tribunal to relevant extracts from Halsbury’s Laws concerning charities and charitable purposes and in particular the critical importance of the exclusivity of purpose requirement.

13. At the hearing of this appeal the tribunal heard evidence from Mr Gary Cliffe and Miss Dina Smith , directors of the Appellant company. Mr Cliffe conceded that the Appellant was not a charity. He said that in setting up the Appellant company as a company limited by guarantee he had decided not to seek registration as a charity as he did not (to use his own words) want “to be a cap-in-hand group drawing money from others” He added however that the Appellant was “from head to toes a charitable organisation”. The aim of the Appellant company was to enable those of limited means to have access to low cost furniture and other domestic items. The surplus funds generated from sales of donated items were used to defray the expense of operation and in this respect it was not the principal aim of the company to make a profit. The operation was essentially a charitable rather than a commercial one. However it was not argued by the Appellant that its activities were exclusively charitable nor did it seem to the tribunal that any such argument could be advanced given the explanation by Mr Cliffe of the way in which the Appellant operated. It was, as Mr Chapman pointed out, quite possible that parents whose means were far from modest might use the services of the Appellant to furnish accommodation for a teenage child or indeed that furniture might be purchased with the intention of reselling at a higher price. There was no evidence that these departures from the essentially charitable aims of the Appellant could not occur.

14.  The tribunal noted that for the year ended 31 December 2007 the Appellant’s profit and loss account disclosed a loss of £8,920 whilst the comparable figure for 2008 was a small profit of £4,627 with a carried forward retained profit of £25,817. These figures appeared to the tribunal to be generally consistent with the account of the Appellant’s activities as related by both Mr Cliffe and Miss Smith.

15. The Appellant contended that its understanding of the position concerning VAT on sales of donated items was dictated by advice it had noted as having been given to The Big Lottery by a national accounting firm and by its reading of the Revenue’s Public Notice 701/1 both of which are referred to above. The tribunal has some sympathy with these contentions. However the advice from the accounting firm, if given in the terms advised by the Appellant, was and is simply incorrect as having no basis in fact or law.

16. The Public Notice 701/1 is, the tribunal feels, unfortunate in its terms as it appears to convey a suggestion that a body not being a registered charity might nevertheless be approved by the Revenue as having a charitable purpose such as to entitle it to zero-rating of its supplies of donated goods. We accept that this was not the intention and that what was intended was simply to distinguish between those bodies which are registered as charities and those charities which are exempted from registration by virtue of section 3A(2) Charities Act 1993. What in fact was conveyed to the Appellant and quite possibly to others in a similar situation is the concept of a more general discretion on the part of the Revenue to approve or not bodies as having “charitable status”. This is regrettable but does not alter the legal position. We were told by Mr John Kington an officer of HMRC present at the hearing that it is the Revenue’s intention to revise the wording of this notice so as to make clear the true position.

17. This was not an appeal in which any of the material facts were in dispute. As indicated above the Appellant conceded that it was not a charity. The tribunal finds that the Appellant does not have exclusively charitable purposes and on that account could not properly be considered a charity whether registrable or not. Despite the ambiguous wording of Public Notice 701/1 we are satisfied that in order to avail itself of the right to zero-rating of its sales of donated goods the Appellant would have to establish its status as a charity, something which as it is presently constituted and operates it is unable to do. In these circumstances the tribunal must dismiss this appeal.

18.   This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

CHRISTOPHER HACKING

TRIBUNAL JUDGE

RELEASE DATE: 7 September 2010