The Court of Justice has not published any significant VAT judgments this week and the UK's higher courts are also quiet. However, the First-tier Tribunal continues to churn out a plethora of decisions. In the Institute for Orthodox Christian Studies case, a charity tried unsuccessfully to have an 'option to tax' disapplied in connection with the purchase of a building. In Simon Coates, the Tribunal quashes a penalty imposed by HMRC in respect of a DIY claim and, in Phoenix Optical Technologies Ltd, the Tribunal sided with HMRC in connection with whether the disposal of assets can be liable to VAT.

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ITU
Summary
The Court of Justice has not
published any significant VAT
judgments this week and the
UK's higher courts are also quiet.
However, the First-tier Tribunal
continues to churn out a plethora
of decisions.
In the Institute for Orthodox
Christian Studies case, a charity
tried unsuccessfully to have an
'option to tax' disapplied in
connection with the purchase of
a building.
In Simon Coates, the Tribunal
quashes a penalty imposed by
HMRC in respect of a DIY claim
and, in Phoenix Optical
Technologies Ltd, the Tribunal
sided with HMRC in connection
with whether the disposal of
assets can be liable to VAT.
30 September 2015
First-tier Tribunal
In normal circumstances, where the seller of a property has 'opted to tax' (ie he has
elected to make the transaction a taxable supply rather than an exempt supply), VAT is
chargeable on the value of the sale. With the VAT rate at 20%, the VAT chargeable on
such a transaction can be very significant. Indeed, for charities that are not 'in
business', the imposition of VAT on the purchase of a property can be and often is a
significant financial burden. UK VAT law recognises this and, for many years now,
charities have been entitled to claim relief from VAT in cases where a building is
intended for use solely for a relevant charitable purpose. In such circumstances, any
option to tax exercised by the seller of the property is statutorily disapplied and the
transaction reverts to being exempt from VAT.
In the case of the Trustees of the Institute for Orthodox Christian Studies, Cambridge,
such a situation prevailed. The Trustees wished to acquire a building upon which an
option to tax had been exercised. Accordingly, the Trustees issued a certificate claiming
that the building was intended for use solely for a relevant charitable purpose such that
the seller's option to tax should be disapplied.
Unfortunately, HMRC disagreed stating that the charity, through its lettings of excess
space in the property and through the charging of fees to students was actively engaged
in a business activity. According to HMRC, the option to tax should not have been
disapplied and VAT should have been charged by the seller.
On the evidence, the Tribunal concluded that HMRC was correct. The letting of
rooms and the fees it receives in connection with religious studies cannot be regarded
as anything other than consideration for the teaching and other supplies it makes. As a
consequence, the Tribunal dismissed the appeal and confirmed that £133,000 VAT
was due on the sale of the property.
Comment – For a small charity, the application of VAT to the purchase price of the
property will have come as a significant blow. In the light of earlier case law however,
it is possible that the Trustees may consider a further appeal. It is important for
charities to fully understand whether their activities are business or non-business
activities for VAT purposes.
Issue27/2015
Charities and the Option to tax
Indirect Tax Update

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GRT100456
First-tier Tribunal
An unreasonable penalty
The Tribunal has allowed an appeal against the imposition of a penalty for an inaccurate DIY
Housebuilder's VAT claim.
In the case of Stephen Coates, the appellant's accountants had compiled a claim for VAT incurred on
the cost of constructing a new house. However, the claim included a number of invoices where the
VAT in question had been incorrectly charged by the builder (this was a new house and the builder's
services should actually have been zero-rated). The remainder of the claim was agreed but HMRC
considered that the error was 'careless' and liable to a penalty of 15% of the VAT claimed in error.
The First-tier Tribunal allowed Mr Coates' appeal against that penalty. It found that he took all
reasonable steps and took reasonable care to avoid the inaccuracy. He saw the need for professional
assistance with his claim and he sought it. He relied upon the work done for him, by his accountants
and it was reasonable for him to have done so. The Tribunal was satisfied that Mr Coates' conduct
was that of a reasonable and prudent taxpayer motivated by a desire to comply with his tax
obligations.
HMRC's penalty assessment was quashed.
Comment
HMRC is increasingly
imposing penalties for
errors which it regards
as 'careless'.
Here, the taxpayer had
relied on the advice and
guidance of his
professional advisors
and the Tribunal found
that he had acted
reasonably.
All penalty assessments
should be reviewed
and, if necessary
appealed as the
Tribunal may overturn
HMRC's decision.
First-tier Tribunal
Comment
Care is always needed
where assets are being
disposed of whether
under ordinary
transactions or, as here
where the
circumstances are out
of the ordinary.
The general rule is that,
if Input VAT has been
reclaimed on purchase
of the asset, output
VAT will almost always
be due when the asset
is disposed of whether
the disposal is for
consideration or
otherwise.
Deemed supplies
In the world of VAT, not only is VAT due on the supply of goods or services for consideration, but
it may also be due in situations where there is no consideration.
In Phoenix Optical Technologies Ltd, the company gave a diamond turning machine to another
business as part of a settlement agreement relating to a breach of contract dispute. The company
argued before the Tribunal that the disposal of the machine was part of the compensation settlement
(along with a cash payment) and, as such, was outside the scope of VAT.
HMRC took the view that the disposal of the machine for no consideration was a deemed supply for
VAT purposes and that as VAT had been reclaimed on the purchase of the machine, VAT was due
on the deemed supply. The Tribunal agreed concluding that on any view, the transfer of the machine
amounted to a supply of goods. There was no basis upon which to say that the transfer of an asset
pursuant to a compromise agreement falls outside the deemed supply provisions of VAT law. Any
exception to the definition of a supply would have to appear on the face of the statute – (for
example, there is an exception in relation to certain business gifts and samples of goods). However,
there is no such exception in relation to assets transferred as part of a compromise agreement.
The taxpayer's appeal was, inevitably, dismissed.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Andrea Sofield London & South East andrea.sofield@uk.gt.com (0)20 7728 3311