Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Business/Non-Business Manual

From
HM Revenue & Customs
Updated
, see all updates

Specific issues: VAT treatment of Groundwork trusts

Background

All activities and costs of Trusts are split into specific projects. In funding terms there are three likely scenarios for projects undertaken by the Groundwork movement:

  1. projects entirely funded by grant or donation;
  2. projects entirely funded by a charge to the landowner; and
  3. projects receiving mixed funding.

Historically these projects have generally been treated for VAT purposes as follows:

  • projects entirely funded by grant or donation - non-business;
  • projects entirely funded by a charge to the landowner - business; and
  • projects receiving mixed funding - mixed business and non-business requiring input tax apportionment.

Business / non-business activities

All of a trust’s activities can be allocated to specific projects. A trust will not normally have any general non-business (such as general management or administration) separate from its project activities. The trust’s business/non-business position will therefore depend entirely upon an analysis of its various projects.

For an activity to be seen as business for VAT purposes it must involve the making of supplies for consideration. The key question in relation to any project is therefore whether or not it involves the making of a supply for consideration to anyone. That person will normally be the landowner.

If a project does not involve any supply for consideration it is wholly non-business.

If a project does involve a supply for consideration it is wholly business. Output tax is due on the full consideration received for the supply, which may include income from third parties. All of the VAT incurred on the project is input tax, whether or not the project is part funded by income that is outside the scope of VAT.

Has there been a supply for consideration?

The answer to this question depends upon the specific facts of each project. If in doubt, you should always look closely at the details of the specific project. You should apply the usual tests of what constitutes a supply for consideration - see VATSC Supply and consideration VAT30000.

The following is intended as a general guide in the context of normal trust activities.

Traditionally projects have either been funded entirely:

  • by grant or donation; or
  • by a charge to the landowner; or
  • by a combination of the two.

In many cases, there will be a supply. However, the method of payment is not necessarily an important factor.

In some cases the trust clearly acts in roughly the same way as a commercial builder. It takes on a project for which there is a specific customer or client. The customer or client commissions and pays for the work in full. Such projects clearly involve a taxable supply and are business.

In other cases what matters is whether there has been a supply for consideration. Projects that:

  • are designed to be of benefit to the community as a whole; and
  • do not involve a supply to any specific organisation or individual

will be non-business.

However, you should not assume that a project is non-business merely because it is wholly or partly grant-funded.

In practice the key questions are:

  • has the trust entered a contractual relationship with the landowner, or another person, to do something tangible for them from which they derive some direct benefit? and
  • does the trust receive payment, which is directly linked to doing that something, even if that payment comes from a third party?

If the answer to both the above is yes, the project is business. Otherwise the project is non- business.

To work out whether there is a contract it is important to distinguish between situations in which:

  • the landowner simply gives permission for a trust to enter onto the land; and
  • the landowner receives a material benefit from the work that is undertaken.

So, for example, a landowner who allows work to be undertaken that is intended, say, to encourage a particular form of wildlife does not of itself mean there is automatically a supply to the landowner. This is so even if the landowner makes a contribution to the cost.

There would, however, be a supply if, for example, the work provided some forms of benefit in terms of the landowner being able to better exploit the land, for example for hunting or fishing purposes.

Similarly, a local authority who agrees to the planting of trees on its land for the benefit of the community at large is unlikely to be receiving a supply unless it has:

  • specifically commissioned the trust to undertake that work; or
  • a statutory duty to ensure that it is carried out.

On the other hand a factory owner who contributes to the cost of refurbishment of the external factory walls will normally be receiving a supply even if a significant part of the cost is met from grant funding.

Input tax

VAT incurred that is directly attributable to non-business projects is not input tax. VAT incurred that is directly attributable to business projects is input tax. VAT incurred on goods or services used partly for business and partly for non-business projects has to be apportioned using any fair and reasonable method.

For certain goods only the trust has the right to adopt the Lennartz approach to non-attributable VAT and treat all of it as input tax: see VIT VAT Input Tax VIT25510.

Some trusts make supplies of training that may fall within the exemptions set out in Group 6 of Schedule 9 of the VAT Act 1994. If they do they will be subject to partial exemption rules.

Output tax

No output tax is due on non-business projects. Any income received in the form of grants or donations is outside the scope of VAT.

If a project is business, output tax is due on the full value of the taxable supplies made. The VAT inclusive consideration for the supply will consist of payments made by:

  • the recipient of the supply, normally the landowner; and
  • third parties

which directly relate to that supply.

In practice any grants or subsidies received by a trust, either from Groundwork UK or from other sources, that are specific to a project will normally form part of the consideration for that project.

Grants and subsidies which a trust receives:

  • in the way of general support of its activities; and
  • that are not specific to any project

are outside the scope of VAT.

Example of a mixed funded business project

A trust carries out a project to build a wall around an unsightly factory to screen it off. The funding of the project is as follows:

  1. the factory owner has to pay £20,000;
  2. Groundwork UK gives a grant of £80,000;
  3. the local authority makes a grant of £15,000; and
  4. the trust provides £5,000 from a general fund made up from bequests and donations.

All payments are inclusive of VAT, where appropriate.

In this case there is quite clearly a supply to the factory owner. This is so even though the trust’s motivation in carrying out the work and arranging the financing may well be to improve the environment of the adjoining community.

Payments 1, 2 and 3 are all part of the consideration for the supply because they are all payments to the trust specifically for the wall to be built. Item 4 is not such a payment and is not part of the consideration. The total consideration is therefore £115,000.

The invoice to the landowner would read:

To environmental services £ 97,872.34
   
Value Added Tax £ 17,127.66
Total due £115,000.00
Less paid way of subsidy £ 95,000.00
Net sum now due £ 20,000.00