SIRI Behavioural Health v Customs and Excise [2005] UKVAT V19016 (11 April 2005)

19016
Value Added Tax – Recovery of input tax – Apportionment – Business and non-business activity – S.24 and 26 Value Added Tax Act 1994 – Appeal dismissed

LONDON TRIBUNAL CENTRE

S I R I BEHAVIOURAL HEALTH 	Appellant

-	and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

		Tribunal:	DR KAMEEL KHAN  (Chairman)
				MRS L M SALISBURY 

Sitting in public in London on 12 November 2004

Mr Patrick Mgbeojikwey & Mr Tony Ogefere, directors, for the Appellant 

Miss Zoë Taylor, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

This is an appeal against a decision of the Commissioners of Customs & Excise to raise an assessment for Value Added Tax in the sum of £7,906 with interest of £732.71, issued on 16 January 2003.  The amount assessed was subsequently reduced to £7,805 on 22 October 2003 with no demand for interest.

Background

1.	Siri Behavioural Health (the Appellants) is a charity registered for UK VAT (Value Added Tax) since 21 September 1998.  The aim of the charity is stated on their letterhead as “providing holistic counselling for disadvantaged people suffering from psycho, social and emotional difficulties”.  They are based in London at 77 Evershot Road, Finsbury Park, London  N4 3EF.

2.	Her Majesty’s Customs & Excise (HMCE) paid a visit to the premises of the Appellants on 20 August 2002 to review their VAT records and books.  At the time of this review, errors were noted in the VAT records and the VAT recovered by the Appellant.  The HMCE Officer decided that VAT had wrongly been recovered by the Appellants as input tax since it was properly attributable to the exempt supply of welfare services.  The supply of welfare services is made exempt under Schedule 9 Group 7 item 9 VATA in 1995 (“VATA” means Value Added Tax Act).

3.	By a letter dated 16 September 2002 from HMCE, the Appellants were notified of the error in their VAT records and of the intention of HMCE to disallow VAT reclaimed as input tax for the period 014/002 074/02.  There were various other letter exchanges between the parties.  In correspondence by HMCE to the Appellants on 6 January 2003, the Appellants were informed that an assessment would be made in the sum of £7,906 to cover the VAT period 01/00 to 10/02.

4.	The Appellants requested a reconsideration of the case in letters to HMCE of 13 January 2003, 31 January 2003 and 6 March 2003, in the last of those letters they requested a “sympathetic approach” to be taken by HMCE to their case. HMCE notified the Appellants in reply to all the letters that the assessment would stand.

5.	On 3 April 2003, the Appellants appealed.  After reviewing the case, HMCE noted that for the years ended 31 December 2000 and 31 December 2001, the Appellants’ income comprised both business and non-business income.  Mr Robert Bernard, HMCE officer, in his evidence explained how the calculations were done.  In the year ended 2000, the Appellants total income, as extracted from their Annual Accounts, was £80,087 which comprised bank interest of £345 with the remainder of £79,742 coming from grants, donations, legacies and sundry income.  The business income for the year ending 2000, as extracted from the VAT returns, was £1,199, HMCE therefore estimated that 2.49 % of the Appellants’ income formed the “business proportion” of their income.  The income was derived from the fees charged for counselling services.  This meant that 2.49% of the VAT reclaimed in the year 2000 was treated as properly recoverable input tax attributable to business supplies.

6.	The recoverable input tax for the relevant period was therefore as follows:

01/00	- £08.26
04/00 	- £13.72
07/00 	- £16.95
10/00	- £11.95
01/01	- £10.26

This meant a total recoverable amount of input tax for the year ending 2000 of approximately £60.
7.	In the year ending 2001, the Appellants total income was £99,702 and it is estimated that 1.03% of that income was the business proportion.  Accordingly, 1.03% of the VAT reclaimed in the year 2001 was treated as properly recoverable input tax attributable to business supplies.  This led to a total recoverable amount of input tax for the year 2001 of £37.92.  The total amount of recoverable VAT for the years 2000 and 2001 was calculated to be £97.94 and when the total recoverable amount of input tax was rounded up, it amounted to £101.  This amount was deducted from the original assessed amount of £7,906, which resulted in an amended assessment of £7,805.  No demand for interest was made.

The Appellants’ Case

The Appellants’ case is largely made on the basis of mitigating circumstances.  This stated that all the VAT returns were done by volunteers due to the poor financial state of the charity.  They had sought assistance from HMCE and had done their best in the circumstances but acknowledged that mistakes were made.  They explained that they would be unable to pay the outstanding VAT.

The Respondent’s Case

The Respondents argued that for the VAT incurred by the Appellants on the sum of £7,906 in the periods 01/00 to 10/02 to be recoverable it must qualify as input tax within the meaning of Section 24 of the VATA 1994.  In the present case, the VAT must have been chargeable on a supply to the Appellant of goods and services used or to be used for the purposes of business carried on by them.  Section 94(1) VATA 1994 defines “business” as “any trade profession or vocation”.  Since the majority of the input tax sought to be recovered was not chargeable on a supply for business services, it was irrecoverable.  The supplies made on which input tax was not recoverable included holistic health treatment, accommodation and care for people with mental health needs, education and training for people with mental health needs, respite care, immigration support services, welfare services and advice services.

The Respondent stated that there was a small amount of VAT incurred by the Appellants which could be treated as input tax within the meaning of Section 24 of the VATA 1994 as it was attributable to taxable supplies made, or to be made in the course of furtherance of business, within the meaning of Section 26(1) and 26(2) VATA 1994. The recoverable amount was input tax incurred on the supply of counselling services for a fee, which formed the business proportion of the Appellant’s income. The assessment was accordingly reduced, as explained earlier, to £7,805.  The assessment was assessed under Section 73(1) VATA 1994 to the best of the officer’s judgment.

Decision

The Appellants are a charity which makes a modest amount of taxable supplies.  When an entity, such as the Appellants undertake both business and non-business activities there must be an apportionment of VAT to each part of the activity.  Input tax is recoverable in accordance with such apportionment or attribution.  When there has been identified the VAT which relates to the goods and services obtained for the purposes of business activity (in this case, counselling services) that amount is recoverable.  The VAT which relates to non-business activity would be input tax which is not recoverable.  This apportionment has been done and modest amounts of input tax is recoverable but a substantial amount of input tax is not recoverable.  The input tax that has been recovered by the Appellants was wrongly recovered as this was properly attributable to exempt supplies of welfare services.

While we understand the financial position of the Appellants, we feel that the provisions dealing with input tax, Section 24 VATA 1994, and its recovery, Section 26 VATA 1994, were properly explained and applied.  The business proportion of recoverable input tax was correctly calculated.  The accounts for the year ending 2003 shows that the Appellants have appointed both solicitors and accountants to act on behalf of the charity.  Perhaps these professionals should have been consulted in the preparation of the VAT returns.  The Appellant should consider seeking appropriate advice in the preparation of future returns.

In the circumstances, we find that this appeal should be dismissed and the assessments were made to the best of the officer’s judgment under Section 73(1) VATA 1994.  We can ask HMCE to consider any reasonable suggestions which the Appellants may have regarding payment.

Accordingly the appeal is dismissed.

DR KAMEEL KHAN
CHAIRMAN

RELEASED: 11 April 2005

LON/03/0327