A Charity Commission intervention and a recent VAT Tribunal case highlight the need for local authorities to consider their legal position carefully when giving funding to charities, writes Richard Auton.
Don't try to take over: Fairfield (Croydon) Limited
On 25 February 2014 the Charity Commission published an Operational Compliance Report into Fairfield (Croydon) Limited. It decided to investigate after reports in local news blogs suggested that Croydon Council were trying to take over the charity. The charity maintains and manages Fairfield Halls, an entertainment venue in Croydon. The council owns Fairfield Halls but leases it to the charity. It then gives the charity a grant which covers the cost of the rent.
It turned out that Croydon Council was planning to invest significant funds in refurbishing Fairfield Halls and wanted to make sure that their funding would be used to the best effect. The council had therefore suggested that it be admitted as a member of the charity and given a 75% voting right at member meetings, thereby effectively turning the charity into a local authority controlled company.
The Charity Commission did not like this idea. Their report distinguishes the case where local authorities are the sole corporate trustee of a charity, as then they have a clear duty to make decisions in the charity's best interests (and for an example of what can happen if they don't, see A knotty problem), from the case where a local authority is simply a member of a charity, as members have no such obligations and can act in their own interests rather than the charity's interests. If they had become a member with 75% of the voting rights, there would have been nothing to stop the council running Fairfield (Croydon) Limited so that decisions it made were in the council's, rather than Fairfield (Croydon) Limited's, best interests. That would have been in breach of charity law.
In this instance, because the Charity Commission got involved at an early stage, it was able to persuade the council to withdraw its proposal. Instead the relationship between the charity and the council would be dealt with by lease and grant agreements (although surrendering the lease, even if it is to be replaced by another, is likely to need Charity Commission approval as a disposal of charity land).
Funding to a charity to provide public services is liable to VAT: Woking Museum and Arts and Crafts Centre v HMRC UKFTT 176 (TC)
Woking Museum and Arts and Crafts Centre (WMACC) is a registered charity that is also registered for VAT. It provides "arts, museum, cultural and public information services" to Woking Borough Council (WBC) under a service agreement that was signed in 2003, in return for an annual fee. WMACC had been charging VAT on the fee in its invoices to WBC, even though HMRC had decided that the services agreement did not constitute a business supply by WMACC but was a grant and so the fee was not liable to VAT.
The First-Tier Tribunal looked carefully at the services agreement and heard evidence from witnesses from both sides. It found that:
- The services agreement was a contract and not a grant from WBC to WMACC. It contained at its heart the mutuality of obligation which is characteristic of a contract (such as the right for WBC to terminate if the services were not provided, and the obligation on WMACC to indemnify the Council against any loss or liability caused to it by WMACC's breach of the agreement). Also WMACC was under no contractual obligation to do anything in particular with the payment received from WBC, which was said to be made "in consideration of the provision of the Services by WMACC".
- The delivery of the services by WMACC provided a direct benefit to WBC rather than just to the community at large, as it meant that WMACC was providing a museum and visitor information service which WBC would otherwise have provided itself under its Cultural Strategy.
- The arrangements between the parties were commercial in nature and so constituted a taxable supply. The simultaneous pursuit of a charitable objective by a service provider did not render the relationship non-economic and therefore not liable to VAT. The same services could be provided by a non-charity.
Outsourcing service provision to not-for-profit organisations is something that is becoming increasingly common, so this decision, that such services can have VAT charged on top of the fee, is something that local authorities will have to factor in to their costings. The Tribunal will look at the facts and, if both parties are taking on obligations, then it is likely to be viewed as an arms-length commercial arrangement, not a grant.