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HMRC internal manual

VAT Business/Non-Business Manual

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HM Revenue & Customs
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Clubs and associations: city livery companies (worshipful companies)

History

The modern livery movement has evolved over the years and has moved well beyond its original purpose. Its diversity of origin, development and activity and the scope of its modern endeavours differ amongst the various livery companies, yet they share a common purpose. Each livery is closely linked to the development and affairs of the City of London. The livery at large represents a wide range of contemporary institutions and professional practices.

The Livery Companies of the City of London are various historic trade associations almost all of which are known as the “Worshipful Company of…” their relevant trade, craft or profession. By the end of 2015, there were 110 different livery companies. Historically, these guilds had considerable control over their craft. They could decide who worked in the industry they represented. They could also influence the working conditions and welfare of their members. In recent years they have engaged in charitable and educational work. Members eventually became known as liverymen because of their distinctive livery or uniform. Clothed in heritage and fellowship, liveries reflect but no longer control their occupations.

8,000 liverymen in 1900 are 28,000 today, some reflecting new occupations, such as Environmental Cleaners, Tax Advisers and Information Technologists.

General principles

Livery companies are treated in the same way as any other membership body or association. Where they provide facilities or advantages to members for a subscription or other consideration they are in business for VAT purposes.

Organisations of this kind with a taxable turnover in excess of the statutory VAT registration level have to account for tax on their membership subscriptions and any other taxable income, subject to the zero-rating and exemption provisions.

For VAT purposes the normal value of the membership supplies made by an organisation is the full amount required to be paid. To work out that value you will need to take into account all the payments which members have to make in order to belong to the organisation and receive the benefits available.

These benefits include the less tangible rights and privileges which are available to members. These may include the right to take part in its activities or to attend dinners or other functions.

Unless there is a corresponding reduction in the amount payable by the member this position is not altered if members do not take up all of the benefits available.

An organisation may still be liable to register for VAT regardless of the treatment of its membership supplies. It will need to do so if:

  • it makes other taxable supplies in the course or furtherance of business, and
  • the value of those supplies exceeds the registration threshold

Additional payments made by members

Additional amounts, or fines as they are known, have to be made by members who hold particular posts or titles within a livery company which entitle them to additional benefits.

Typical payments by liverymen are for the following:

  1. admission (or freedom) fine - a one-off initial joining or entry fee;
  2. annual quarterage - an annual payment made by all liverymen who are entitled to various benefits including the right to attend dinners and other functions;
  3. livery fine - an additional one-off payment made on becoming a liveryman;
  4. court fine - an annual payment made by members of the courts who may obtain additional benefits, including free admission to court dinners and other functions;
  5. junior warden’s, senior warden’s and master’s fines - one-off payments made by members holding such posts.

The payments listed at i. to iv. above comprise either:

  • the basic subscription;
  • other initial payments which members have to make; or
  • additional payments which may provide additional benefits (including ties and newsletters) and/or obligations.

As such they are all standard rated since they are all made in return for benefits received unless the VAT exemption detailed below applies.

The same rules apply to the payments listed at v. if the payer receives additional benefits.

VAT exemption does not apply to supplies made by livery companies to non-members. These are standard-rated unless they fall within the scope of a different exemption or the zero-rating provisions.

Exemption under Schedule 9, Group 9

Group 9 provides for an exemption for ‘subscriptions to trade unions, professional and other public interest bodies’.   While it is possible that some livery companies meet the exemption criteria under Items 1 (a) to 1 (e) of Group 9, the majority of livery companies that are eligible for the exemption will qualify under items 1(c) or 1(e), subject to their respective conditions.

In interpreting the law in this area we are guided to the decision in the case of the Institute of Leisure and Amenity Management. See VBNB75920.

EU case law established that the exemptions are to be construed narrowly, as they constitute exceptions to the general principle that all services supplied by taxable persons for a consideration are liable to VAT.

An organisation’s activities can only qualify for exemption where that activity is its primary purpose or main object. This was confirmed in the decision of the ECJ in Institute of Motor Industry (C-149/97) and in the decision of the Court of Appeal in *Expert Witness Institute *([2001] EWCA Civ 1882).

The primary purpose of livery companies is accepted as being to promote or reflect their trade, craft or profession.

Where there are supplementary aims, these are regarded as the means by which the primary objective is achieved, for example:

  • to actively support philanthropic, charitable and educational good causes
  • to foster fellowship amongst their members
  • to support the work of the Lord Mayor and the civic City

The aims of an organisation can be determined by examination of its constitutional documents and what it does in practice. An organisation will normally have a single activity that constitutes its main or primary aim. It is the character of this aim that will determine the VAT liability of the supply it makes. It is possible that an organisation conducts a number of activities, none of which predominate. In such circumstances, VAT exemption will not apply to the supplies. Where the objects or purposes are solely or mainly for the benefit of members, the organisation’s supplies will not qualify for exemption.

Exemption by reliance on Item 1(c)

Item 1 (c) has two parts that must be satisfied to qualify for VAT exemption as determined by the courts.

A). Part One

The first part is ‘the advancement of a particular branch of knowledge’,

Tribunals and courts have given ‘branch of knowledge’ a narrow interpretation. In the tribunal case of British Institute of Cleaning Science Ltd (LON/85/184), it was found that this should normally be a recognised branch of science or the arts. Further tribunals have followed this approach in British Organic Farmers (LON/87/164) and British Association for Counselling (LON/93/1494). In each case, the tribunal found that for exemption to apply, the livery company purpose should have a direct connection with science or the arts.

Tribunal case law takes the view that knowledge that is primarily practical rather than academic in nature does not constitute a recognised branch of knowledge. The case law on this area has determined that knowledge relating to the confined area of a specific job does not constitute a branch of knowledge.

While it is likely that livery companies based upon the academic professions including Accountancy, the Medical Professions, and the Legal Profession are more likely to evidence eligibility for VAT exemption under Item 1(c), it is harder for those concerning trades like Bakers, Blacksmiths or Bowyers, which tend to be practical professions.

B. Part Two

The second part of obtaining exemption under Item 1(c) requires that the primary purpose of the livery company is the ‘fostering of professional expertise’ *of their members’ profession, which can be described as developing or nurturing members’ professional knowledge, skills or proficiency. *This will depend on the nature of the activities, whether the purpose has a direct connection to furthering a recognised profession and whether it is again the primary purpose.

The meaning of ‘profession’ and ‘professional’ has been considered by numerous tribunals. They have considered whether the man in the street would regard the occupation as a profession when made aware of what the occupation actually entails.

Leading Case Law

The following tribunal cases feature associations adjudged to have a primary purpose which meets the conditions for exemption:

 

Organic Farmers (LON/87/164) – An association was established with the aim of promoting research into organic farming. The tribunal found organic farming to be a science and therefore within the exemption.

 

British Association for Counselling (LON/93/1494) – Counselling was found to be a branch of knowledge based on the evidence of academic courses.

 

The purposes of the following associations were held to be ineligible for the exemption:

Royal Photographic Society (VATTR 191) – Membership was open to any person interested in photography whether or not professionally. It was decided that the purpose did not meet the conditions of 1(c) by virtue of Note 4, which states that “paragraph (c) does not apply unless the association restricts its membership wholly or mainly to individuals whose present or previous professions or employments are directly connected with the purposes of the association”.

Bookmakers’ Association (VATTR 215) – The tribunal held that the company’s main activity was advising and helping its members in their day-to-day business. This was not for the advancement of a branch of knowledge, the association did nothing to foster its members’ expertise and even if it did, their expertise was not professional.

In general, supplies of membership subscriptions, including those listed above as “typical payments by liverymen” (i. to v.), are taxable at the standard rate if members are entitled to benefits in return for their subscriptions.

Summary

To summarise, for exemption to apply under Item 1(c), we expect the following:

The primary purpose of the livery company is either ‘the advancement of a particular branch of knowledge’ or ‘the fostering of professional expertise’. It achieves this by the livery company having a direct connection with the arts or science and nurturing and developing the skills of members who are seen by others (the average man on the street) to be engaged in a profession.

Exemption by reliance under Item 1(e)

Again, there are two parts that need to be met for exemption to apply:

  1. a body whose objects are in the public domain; and
  2. are of a political, religious, patriotic, philosophical, philanthropic or civic nature.

 

  1. Part 1

In considering point 1, HMRC consider this means that for a body’s objects to be in the public domain, they are directed outside their particular organisation and beyond the members themselves to the general community.

Livery companies that promote the advancement of the company to their members only, would be considered of limited interest to others or the public generally and would therefore fail to meet the conditions for exemption.

In a tribunal involving The Worshipful Company of Painter-Stainers (“WCPS”)(V 20668), they argued that its objects were of a patriotic, philanthropic, or civic nature. It sought to rely on activities of its associated charities to secure exemption as a philanthropic body. The tribunal dismissed this argument as the activities of WCPS were mainly directed to providing benefits to its members.

  1. Part 2

In considering part 2 of Item 1(e), in addition to having objects that are in the public domain, livery companies must have as their main aim, objectives which are of a political, religious, patriotic, philanthropic or civic nature.

The courts have considered several cases to decide whether the organisations in question have aims of a philanthropic nature in particular. What is clear is that to qualify for exemption it is not enough for the organisation to carry on an activity of a philanthropic nature, the activity must be the primary object.

Court decisions not falling within the scope of the exemption:-

  • The High Court case of The British Association for Shooting and Conservation (BASC) v HMRC (2009)(EWHC 399 (Ch)) concerned exemptions for sport and membership subscriptions. In finding for HMRC on the subscription point, the Court disagreed with BASC’s argument that its activities were political and therefore exempt. The Court found “the fact that an organisation undertakes political activities does not necessarily mean that its aims are political.”

 

  • The CJEU case of the Institute of the Motor Industry V HMCE (C-149/97) implies that to qualify for exemption under the EU equivalent of Item 1(e), an organisation’s main objectives must be of a political, religious, patriotic, philanthropic or civic nature.

 

  • In the tribunal case of United Grand Lodge Of England (UGLE) V HMRC VAT Decision (TC/2010/7066) it accepted that within UGLE’s aims are those of a philosophical, philanthropic and, to some smaller extent, civic nature. However it also has other aims and the subscriptions would qualify for exemption only if the other aims were minor or ancillary to the qualifying aims.

The FTT concluded that UGLE had a variety of aims, some of which came within the scope of the exemption and some of which did not. In their opinion, the 30 aims which did not fall within the exemption were of sufficient magnitude to cause UGLE to fall outside the words of the exemption.

  • In the case of Civil Service Pensioners’ Alliance (2005)(V 18911), the alliance claimed exemption under Item 1(e). The appeal was dismissed as the fact that it primarily provided services to its members meant that it did not fall within item 1(e). In pursuing the interests of pensioners more widely, the alliance was still pursuing the interests of its own members, which precludes exemption

Court decisions that do fall within the scope of the exemption:-

  • Rotary Clubs’ (1991)(VATTR 177) primary objects were accepted as being ‘redolent of a desire to promote the well-being of mankind by serving one’s fellow-men’. Their objects were therefore accepted as being philanthropic and therefore eligible for the exemption.

Summary

To summarise, for exemption to apply under Item 1(e), we expect that the organisation’s objects benefit the wider population rather than just their members and their primary purpose must be of a political, religious, patriotic, philosophical, philanthropic or civic nature.

Apportionment of membership charges

As livery companies are non-profit making organisations, they are entitled to benefit from Extra-Statutory Concession 3.35, which states:

VAT: apportionment of certain membership subscriptions to non-profit making bodies

Where a membership body supplies, in return for its membership subscription, a principal benefit, together with one or more ancillary benefits, it will normally have to treat the subscription as being in return for that principal benefit. This means that the body will have to ignore the liability to the VAT of the ancillary benefits and account for VAT on the whole subscription based on the liability to VAT of that principal benefit.

However bodies that are non-profit making and supply a mixture of zero-rated, exempt and/or standard rated benefits to their members in return for their subscriptions, may apportion such subscriptions to reflect the value and VAT liability of those individual benefits, without regard to whether there is one principal benefit. This concession may not be used for the purpose of tax avoidance.

Although it is entirely up to the individual livery companies, if they choose to take advantage of the concession, they cannot apply it retrospectively. Furthermore, the concession requires its users to apportion all types and elements of their subscriptions. For example, they cannot ‘pick and choose’ to apportion elements such as zero-rated printed matter without also apportioning out exempt and standard-rated elements of the subscription.