Date of issue: 2nd March 2005

ACCOUNTANTS WARN NURSERIES OVER VAT RULING

Chartered accountants Clement Keys, Birmingham says the VAT status of nursery and
crèche facilities supplied by charities is not as cut and dried as recent High Court rulings would suggest.

Yarburgh Children's Trust and St. Paul's Community Project Ltd contested claims by
H M Customs and Excise that they were acting as a business for VAT purposes when providing nursery and crèche facilities for pre-school age children as part of their
charitable objectives.

Judgements were handed down in favour of the charities on the basis that the nature of their respective enterprises was a genuine social concern for the welfare of disadvantaged children. This was supported by the fact that the charities deliberately set their fees at a low level with the objective of simply covering costs.

"If the ruling had gone the other way there would have been serious implications for charities and not-for-profit organisations, not least because treating those activities as business activities would have prevented them from acquiring new premises free of VAT," says Steven Simmonds, director of VAT services at Clement Keys, Birmingham.

"Despite these High Court judgements Customs continues to maintain that a business activity is possible even where there is no profit motive,"

"So, while Customs accepts that organisations operating children's nurseries broadly in line with Yarburgh Children's Trust and St. Paul's Community Project will not be classed as business activities for VAT purposes, in other instances they will apply a six-point test to determine whether a not-for-profit organisation's activities bear the characteristics of a business."

In the High Court cases both organisations were seeking the zero VAT rate on the construction of new nursery premises. While such supplies would usually be subject to VAT, UK law does make provision for construction work to be zero-rated where buildings are used by charities for activities other than business.

Zero-rating can be highly beneficial to charities because if their activities are classed as exempt, the amount of VAT they can recover is strictly limited.

Customs denied Yarburgh Children's Trust and St. Paul's Community Project zero-rating because they considered they were making business supplies despite the fact that the charities' fees were subsidised by government grants, fundraising activities and donations.

"The essence of Customs' argument is that organisations in a similar position to Yarburgh and St. Paul's benefit from being classed as businesses and it would not be in the interests of the charity sector in general if all charitable activities were viewed as non-business," adds
Steven Simmonds.

"Charities and not for profit organisations should review their activities in the light of these decisions and determine whether they would be better off seeking a non-business status or whether the status quo should be maintained."