Reverse charge VAT and charities with non-business activities

A recent First Tier Tribunal (FTT) decision may be very important for charities and other entities which have both business and non-business activities, and are receiving services from outside the EU in respect of the non-business activities.

Last updated: 29 November 2018

Wellcome Trust Limited (WTL) makes payments to non-EU overseas investment managers relating to the management of WTL’s investment portfolio. In a previous ECJ case it had been confirmed that the management of charitable investments by WTL i.e. the buying and selling of shares, was a non-business activity. It follows that WTL is not entitled to deduct any VAT it may incur on management of those investments. Where such fees are charged by a UK investment manager (the place of supply thus being the UK) WTL could not deduct VAT. 

However, where services are received from outside the EU, the question arises as to whether the place of supply is outside the UK (in which case no VAT applies) or is within the UK under the reverse charge rules, such that WTL must account for UK VAT on the value of the services to HMRC. Article 43 of the Principal VAT Directive states that ‘a taxable person who also carries out activities or transactions that are not considered to be taxable supplies of goods or services shall be regarded as a taxable person in respect of all services rendered to him’. Article 44 then treats the supply of services made to a taxable person ‘acting as such  ’as being made where the taxable person receiving the service belongs. Article 45 provides that services supplied to any person acting in a private capacity are made where the supplier belongs.

Since 1st January 2010, WTL had been accounting for output tax in the UK in respect of investment management services it purchased from non-EU suppliers. It claimed repayment of that VAT, amounting to c£13m, and HMRC refused the claim.

HMRC considered the place of supply to be the UK under Art. 44, so that WTL was right to account for VAT under the reverse charge provisions, whilst WTL asserted the place of supply to be outside the UK and thus UK VAT under the reverse charge is not due. WTL’s argument was that the words ‘acting as such’ in Art. 44 took the Trust out of the requirement to account for VAT on investment management services supplied to it from outside the EU. It was agreed that WTL was not acting in a private capacity so Article 45 was not relevant.

HMRC considered that all taxable persons must fall into either Art. 44 or Art. 45. As it was agreed WTL was not within Art 45 they argued that WTL must account for reverse charge VAT under Art 44 and that the words “acting as such” did not have any effect.

The FTT disagreed. There was a ‘gap’ between Art 44 and Art 45 and that the words ‘acting as such’ excluded WTL from a requirement to account for VAT under Art 44 to the extent that the services received are  for the purposes of its non-economic business activity. The FTT found that there is nothing in the provisions which requires someone to fall within either Article 44 or 45.

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