Woking Borough Council Case – Grant v Contract again!
Woking Museum and Arts and Crafts Centre (‘WMACC’) believed that a service agreement it had entered into with Woking Borough Council (‘WBC’) was subject to VAT but HMRC held the view that WMACC was not making a supply by way of business and so for VAT purposes the service agreement was outside the scope of VAT. As a result, WMACC appealed and that appeal was allowed by the First Tier Tribunal (‘FTT’).
WMACC is a charity which agreed to provide WBC with certain services which WBC would pay for on an annual basis. WBC owns certain artefacts but Woking was lacking a museum and as a result WBC proposed to establish a museum where the artefacts could be displayed. WBC identified a site, which it owned and on which a purpose built museum was constructed. WBC paid WMACC a £3m capital contribution (+ £500K development funding) towards the cost of constructing the building; WBC entered into a lease of the building with WMACC for a period of 99 years at a peppercorn rent of £1 per annum.
Consequently, WMACC and WBC entered into a services agreement whereby WMACC provided WBC with arts, museum, cultural and visitor information services (‘the services’). It is the VAT liability of these services that was the subject of the FTT appeal which held that the arrangements between WMACC and WBC constitute a taxable supply for the following reasons:
- The services agreement is a contract between the parties, rather than a grant from WBC. It contains mutual obligations, which is characteristic of a contract, furthermore the FTT took into account that WMACC would be liable for breach of contract should it fail to perform certain services. Also, the contract states that the payment made by WBC is in respect of consideration for the supply of the services;
- The services supplied by WMACC directly benefit WBC;
- The arrangements between the parties are commercial in nature;
- The payments made by WBC were never intended to represent a part payment, the consideration was made in the hope that WMACC would derive additional earnings from other activities e.g. donations, sponsorship. Even though the agreement had been disadvantageous to one party it is distinguished from a contract which provided only for part payment.
As this is a FTT decision it does not set a precedent but nevertheless provides an illustration of some of the complexity that surrounds VAT and charities. It is always critical to consider the details of the agreements involved with such arrangements in advance of them being finalised to ensure that the VAT positioned is maximised.