There is a common misunderstanding in the charity world that tax
avoidance, and its ugly sister - tax abuse, cannot be regarded as
applying to charities except where charities are 'hijacked'
to line the pockets of wealthy ostensible donors. But that is
simply not the case. A charity which seeks to maximise its own
resources for its bona fide charitable work, by entering into
sophisticated VAT planning schemes, is equally open to the
accusation that it has carried out an abuse.
In the VAT world, the doctrine of 'abuse' is a last resort
weapon that HMRC can use where it is not supported in its view of
the position by the black letter of VAT legislation, but it can
point to two features of the behaviour of the taxpayer. The first
is that the schemes, whilst appearing to comply with the
legislation, defeat the general purpose of the EU VAT legislation.
The second is that the essential purpose of setting up the
arrangement was to avoid tax. If these two ingredients apply, then
a charity is equally open to an attack from HMRC as any commercial
company. Where it can be proved, HMRC can tax the charity in
accordance with what would have happened if the charity had not
implemented the scheme in the first place.
This point is emphasised by the recent Upper Tribunal decision in
the case of the University of Huddersfield. Huddersfield
entered into an extremely aggressive avoidance scheme known as a
'lease and leaseback' scheme, the details of which needs
not detain us. This was intended to allow it to reclaim VAT on a
substantial capital programme under circumstances where they would
normally only have reclaimed roughly 10% of the VAT. They did this
in the late 1990s at a time when tax avoidance was widespread. HMRC
issued assessments for the VAT claimed on the basis of
'abuse'.
It is not clear why the litigation then rumbled on for such a long
period, but suffice to say that the First Tier Tax Tribunal reheard
the case in 2013 and decided, somewhat surprisingly, that the
University had not been involved in abuse. But in October 2014 the
Upper Tax Tribunal reversed that decision and held that the
University had carried out an abusive scheme.
There is a possibility of course that the University will appeal to
the Court of Appeal.
The First Tier Tribunal's reason for upholding the
University's view was not that its scheme had not been abusive
overall, since there were aspects that it accepted were abusive. It
was, rather, that it did not become obvious that there was an abuse
until many years into the actual scheme, and that HMRC had assessed
too early, and had assessed the wrong figure. It should have waited
until later and then it could have made an appropriate assessment.
This was enough to defeat the assessment issued by HMRC against the
University. The Upper Tribunal regarded this dissection of the
proposed transactions to be unrealistic. It pointed to the overall
scheme being preordained, at least to some extent, and that
therefore HMRC had grounds to think of it being abusive from the
outset. The Upper Tribunal therefore held the assessment to be
broadly correct.
Whatever the merits of Huddersfield's case, the point that is
abundantly clear is that HMRC will pursue charities on the basis
that they are carrying out an abuse irrespective of the use to
which they put the savings in tax that they ostensibly achieve, and
will pursue charities aggressively owing to the track record of
charities in using such avoidance schemes, albeit usually sometime
in the past.
Any charity which believes it may be exposed to HMRC scrutiny from
a scheme that appears to fulfil the true criteria of
'abuse' may want to take professional advice and in that
connection they are welcome to contact Graham Elliott.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.