The recent case of Loughborough Students Union (and others) v HMRC has shed new light on the ability of charities and not-for-profit organisations to recover VAT on their fundraising events.
In addition to highlighting the multitude of events enjoyed by today's university students (they start their week with a "Mega Monday", end it with a "Friday Night Disco" and can enjoy a "Subversion Night", "Hey Ewe" and "Baywatch Beach Party" in between) the case considered the serious matter of whether the UK law was contrary to the European Directive on this matter.
The key question was whether events in the social calendars of four English universities, were 'fundraising events' or just social events which had been designated as fundraisers by the student unions which laid them on. Evidence given during the hearing suggested that the social events which were expected to raise the most money were cherry-picked to be 'fundraiser' events in order to benefit from the VAT exemption to the maximum extent. The Tribunal judge held that none of the events qualified as fundraisers and the claims for repayment of output VAT were denied.
Under UK law, supplies by a charity or not-for-profit organisation in connection with a fundraising event are exempt from VAT provided certain requirements are met, including: (1) the primary purpose of the event is the raising of money and (2) the event is promoted as being primarily for this purpose.
The exemption can apply to a maximum of 15 events of the same kind (and in the same location) each financial year.
The exemption will be denied if it is likely to create distortions of competition which would place a commercial enterprise at a disadvantage. This was relevant, since the pubs, bars and night clubs of university towns compete for the same student pounds as the Student Unions.
The 'purpose' test
The Student Unions argued that there was no contradiction in an event being both a part of the social calendar and a fundraising event. They insisted that an event with a dual purpose could still be a fundraising event.
The judge held that in order to get the benefit of an exemption from VAT a strict construction of the law must be adopted. As such, he concluded that "fundraising need not be the sole purpose of the event but if fundraising is not the main purpose of the event then.... it is not a 'fundraising event', it is instead merely an event which has the incidental purpose of being expected to yield a surplus." He agreed with HMRC that (with the exception of Bournemouth's Summer Balls, which were disqualified on 'distortion of competition' grounds) the primary purpose of the Student Union events had been to provide recreational activities to the students. The events were ordinary 'business as usual' events. The only material difference between the Student Unions' fundraising events, when compared to all the other social events, was that they were expected to be more profitable.
The 'promotion' test
As for the requirement to promote an event as being primarily for the raising of money, the judge held that merely labelling the event as fundraiser was not proof that the event was organised as a fundraiser.
The EU question - was UK law compliant with the Directive?
The Student Unions argued that both the purpose test and the promotion test imposed under UK law were not required under EU law and should therefore not have been applied. The Tribunal held that the test of 'primary purpose' was consistent with the Directive, but the test of 'promoting' the event was not and it was an unwarranted restriction.
With regard to the promotion requirements for a fundraising event, the news is good. If the fundraising aspect of an event is not overtly referenced in the event's marketing materials, this should no longer in itself be a problem (though it is, of course, possible, that HMRC will appeal the decision).
The picture is less clear with respect to the 'primary purpose' issue. Many charity events have more than one purpose. For example, a charity may hold an event to celebrate an anniversary such as the end of WW1 or the inauguration of the charity. The purpose of such events may both to raise the profile of the charity as well as raise funds. Which is the primary purpose? Sadly, the Loughborough case has not provided guidance on how to answer this question.
In general, we consider the VAT treatment of most conventional fundraising events will be left unaltered by this case. Nonetheless, it has confirmed that the concept of a primary purpose to raise funds remains a requirement which, in some instances, could be difficult to evidence.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2018