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VAT exemptions for eligible bodies

Terri Bruce

The Upper Tribunal decision in the case of St Andrew’s College Bradfield (the college) could have ramifications for any not for profit entity which treats its supplies as exempt from VAT on the basis that it does not distribute profits or it only passes profits to an associated non profit making body.
This case emphasises that unless the legal agreements specifically prohibited the distribution of profits, then exemption may not apply. It specifically impacts companies making sporting supplies but the principles could have wider implications especially for entities making supplies of cultural services or education supplies for example.

The college is a co-educational boarding school. It is registered for VAT as part of a VAT group with two trading subsidiaries which provide sports services. The college argued that the supplies made by the two trading subsidiaries were exempt from VAT under the VAT Act 1994 as supplies made by eligible bodies.

Both of the college’s subsidiary companies had been purchased as off-the-shelf companies and the Memorandum and Articles of Association of both companies did not contain any prohibition or restriction on the distribution of profits.

Both companies entered into deeds of covenant whereby they agreed to pay the college annually an amount equal to their profits as computed for corporation tax, and both entities regarded themselves as bound to pay all taxable profits to the college, and did so.  However, the court found that the deeds did not achieve a binding obligation for the companies to pass the profits to the college.

As a result, the Upper Tribunal ruled that the trading companies were not eligible bodies and their supplies of sporting services did not fall under the sporting exemption.

The court referred to the ECJ decision in Kennemer Golf and Country Club which made it clear that the objects of the organisation in question as defined by its constitution are “the primary – and indispensable, even if not necessarily sufficient – source from which to ascertain the aims of the organisation”.

The Upper Tribunal further said:
“Note 2A(a), read as a whole, appears to us to be a prescriptive provision which requires specific restrictions on a body’s ability to distribute any profit that it makes.”

It is highly recommended that any entity which treats its supplies as exempt from VAT on the basis that it does not distribute profits or is precluded from distributing profits should review its Memorandums and Articles of Association and other relevant legal documents to ensure that it meets the necessary criteria.
Please contact Terri Bruce or your usual VAT contact for further information.