The recent decision of the First Tier Tribunal (FTT) in the case of The Serpentine Trust Ltd (STL) is an interesting judgment and a reminder that the VAT treatment of patron/supporter schemes is complex and may affect many organisations.
STL is a registered charity operating two art galleries and runs five supporter schemes. Supporters are entitled to receive specific benefits, depending upon the scheme supported. Benefits include priority booking rights for events, free invitations to exhibitions and events where refreshments are provided. In order to receive the benefits the supporter has to pay the full amount of the scheme joined. A supporter is not be entitled to receive any of the benefits summarised in that category by paying less than the full amount stipulated at each level.
STL did not account for VAT on the supporter income generated. It treated these amounts as donations and outside the scope of VAT. HMRC believed the payments received were consideration for the supply to supporters of the benefits afforded. In 2012 HMRC raised retrospective VAT assessments totalling over £170k and also reduced a VAT repayment claim (in respect of VAT accounting period 09/12) by an additional £166k.
HMRC’s position, upheld by the FTT, is that the supporter income was a single (rather than multiple) taxable supply. HMRC refused to allow the charity to use Extra Statutory Concession (ESC) 3.35 which allows the apportionment of membership subscriptions to non-profit making bodies. In this case, some supporters received printed matter (a catalogue) which would be zero-rated if supplied in isolation. HMRC’s approach is that ESC 3.35 may only be used by genuine membership organisations i.e. where members have some democracy over the control of the body and are afforded voting rights. Members are usually defined in the organisation’s memorandum and articles or some other governing document.
STL’s case was, essentially, that the supporters wished to donate money to it. The provision by the charity of any benefits was simply an acknowledgement of the donation. Benefits were not given or supplied in return for the payment. The value of the benefits was less than the payment received.
The FTT rejected the charity’s arguments and upheld HMRC’s assessments. If HMRC view the errors as arising from a failure to take ‘reasonable care’ a 30% penalty may be applied. In this case that could result in an additional £100k owing to HMRC.
HMRC VAT Notice 701/1 Charities (May 2014 edition – last update) reads as follows:
5.14 Patron and supporter schemes
Many cultural organisations operate patron or supporter schemes, which offer benefits in return for a minimum payment. Benefits may include free admission to special exhibitions, the right to receive regular publications, discounts on shop purchases etc. The minimum payment is business income and is standard-rated. However, if one of the benefits to patrons or supporters is the right to receive publications you may be able to treat part of the payment as zero-rated. Please see VAT Information Sheet 2/01 (July 2001) Single or Multiple Supplies – How to Decide.
If a patron or supporter pays more than the minimum amount you can treat the excess as a donation and outside the scope of VAT as long as the patron or supporter is aware that scheme benefits are available for a given amount, and that anything in excess of that amount is a voluntary donation. This should be explicit in the patron or supporter scheme literature.
The decision of the FTT is recent (this case was heard on 11 August 2014 and released on 8 September 2014) and is only binding on the parties involved. It is not clear how the judgment will be interpreted or if there will be a policy announcement by HMRC. The paragraph referred to above clearly states that where publications are given to supporters zero-rating may be available, in part. In the case of STL both HMRC and the FTT refused to allow zero-rating and this may be an area HMRC Charities are reviewing.
If charities and other voluntary organisations operate patron/supporter schemes we would recommend the position be reviewed, even if agreement regarding VAT liabilities has previously been agreed with HMRC. Should you wish to discuss the potential impact of this case, or any other VAT matters further, please do not hesitate to get in touch.