It is not unusual for charities, particularly those in the
heritage, education, and culture sectors, to attract donations by
means of minor benefits in return for specific suggested donations.
They are usually called 'committed giving schemes', or
perhaps 'friends' schemes'.
We have, for a long time, understood that there is a significant
VAT danger in such arrangements. Following the twenty year old
decision in the case of Tron Theatre it is established
case law that where benefits are offered in return for a
'donation' then, irrespective of the intrinsic value of
those benefits, VAT can be chargeable on the full payment made in
return, which equates in effect to the full donation. This
contrasts somewhat misleadingly with the gift aid rules which only
give rise to a tax disadvantage where the value of the benefits (on
an intrinsic basis) exceeds certain parameters. The only way around
this, subject to obtaining HMRC's clearance for something more
benign, is to show the donor how much the benefits are worth, show
the balance as the true donation, and imply (indeed, it is
preferable to state clearly) that the benefits can be procured only
by paying the value of the benefits, and no donation is actually
necessary. In practice most organisations find that the benefits
that they offer are only of interest to those who would not dream
of only paying the basic cost value, and this rarely leads to any
particularly difficulty in obtaining the donatory sum.
It appears that Serpentine Gallery did not take this point on
board, and simply equated the receipt of certain fairly low level
benefits with the full sums of the donation that each
'friend' would provide. HMRC challenged this and the case
has proceeded to the First Tier Tax Tribunal. Unfortunately, the
Tribunal was not prepared to overturn the superior case law of
Tron Theatre. It confirmed the unfortunate fact that a
donation of a potentially very significant sum of money could be
regarded as 'payment for' some fairly immaterial benefits
except where those benefits have a clear cut open market price
which can be used as a peg in order to limit the apparent taxable
value. The Gallery tried to argue that the benefits were 'de
minimis', but they were not. It tried to argue that the true
value should be used for the VAT valuation, but ran into the
Tron precedent and failed.
More alarmingly, perhaps, it tried to argue that part of the charge
should be for either exempt or zero rated supplies, and only part
of the price standard rated, and this also was not accepted by the
Tribunal. This is unfortunate, since it implies that there was a
single supply of 'involvement' with the Gallery, whereas,
if one looked carefully at the activities offered to the donors,
there was a variety which did not particularly impinge on each
other. But the Tribunal did not see it that way, and although it is
only a court of first instance and therefore not binding on any
other tribunal, it seems to set some kind of precedent.
Furthermore, the Tribunal unfortunately put the spotlight on an
extra statutory concession (ESC 3.35) which allowed such an
apportionment for 'membership charities'. HMRC had not
accepted in this case that the Gallery was offering membership, and
therefore denied the application of the particular extra statutory
concession. This came as something of a surprise to the Gallery,
and indeed the entire art and culture sector. The concession does
refer to 'members' rather than 'donors', but that
distinction has rarely been applied in the past. It is now clear
that HMRC does take the view that it limits the definition. I have
seen other examples where HMRC has recently taken that line.
Organisations that are applying the concession to 'friends'
schemes' where the friends are not formally 'members'
of the charity, may find that they are challenged in the future by
HMRC.
The best way to deal with this is to consider the position afresh,
without ignoring the gift aid impact. The best approach is a
'split payment' approach as discussed above. Short of that,
the charity should review its correspondence with HMRC to see if
there is any comfort in regard to its current way of treating
donations. If there is any degree of doubt, the charity should take
professional advice.
Withers offers professional advice in regard to the VAT and gift
aid treatments of sophisticated donation packages, and would be
very happy to help anyone who believes that might be an issue for
them.
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.