Legal and governance training and consultancy
for the voluntary sector

Ch.1: Setting up an organisation
Ch.2: Unincorporated organisations
Ch.3: Incorporated organisations
Ch.4: Charitable status, charity law & regulation
Ch.5: The organisation's objects
Ch.6: The organisation's name
Ch.7: The governing document
Ch.8: Registering as a charity
Ch.9: Branches, subsidiaries & group structures
Ch.10: Changing legal form
Ch.11: Collaborative working, partnerships and mergers
Ch.12: Members of the organisation
Ch.13: Members of the governing body
Ch.14: Officers, committees & sub-committees
Ch.15: Duties & powers of the governing body
Ch.16: Restrictions on payments & benefits
Ch.17: The registered office & other premises
Ch.18: Communication & paperwork
Ch.19: Meetings, resolutions & decision making
Ch.20: Assets & agency
Ch.21: Contracts & contract law
Ch.22: Risk & liability
Ch.23: Insurance
Ch.24: Financial difficulties & winding up
Ch.25: Employees & other workers
Ch.26: Rights, duties & the contract of employment
Ch.27: Model contract of employment
Ch.28: Equal opportunities in employment
Ch.29: Taking on new employees
Ch.30: Pay & pensions
Ch.31: Working time, time off & leave
Ch.32: Rights of parents & carers
Ch.33: Disciplinary matters, grievances & whistleblowing
Ch.34: Termination of employment
Ch.35: Redundancy
Ch.36: Employer-employee relations
Ch.37: Employment claims & settlement
Ch.38: Self employed & other contractors
Ch.39: Volunteers
Ch.40: Health & safety
Ch.41: Safeguarding children & vulnerable adults
Ch.42: Equal opportunities: goods, services & facilities
Ch.43: Data protection & use of information
Ch.44: Intellectual property
Ch.45: Publications, publicity & the internet
Ch.46: Campaigning & political activities
Ch.47: Public events, entertainment & licensing
Ch.48: Funding & fundraising: General rules
Ch.49: Fundraising activities
Ch.50: Tax-effective giving
Ch.51: Trading & social enterprise
Ch.52: Contracts & service agreements
Ch.53: Financial procedures & security
Ch.54: Annual accounts, reports & returns
Ch.55: Auditors & independent examiners
Ch.56: Corporation tax, income tax & capital gains tax
Ch.58: Investment & reserves
Ch.59: Borrowing
Ch.60: Land ownership & tenure
Ch.61: Acquiring & disposing of property
Ch.62: Business leases
Ch.63: Property management & the environment
Ch.64: How the law works
Ch.65: Dispute resolution & litigation

This page contains information that has appeared on Sandy Adirondack's legal update website for voluntary organisations at For current updates, including potential changes that are in the pipeline, see the legal update website.

These websites for each chapter update the 3rd edition of The Russell-Cooke Voluntary Sector Legal Handbook by James Sinclair Taylor and the Charity Team at Russell-Cooke Solicitors, edited by Sandy Adirondack (Directory of Social Change, 2009). The websites are not intended as a comprehensive update and should not be treated as such.

To order a copy of The Russell-Cooke Voluntary Sector Legal Handbook, print out the order form at or send an email order by clicking . It costs £60 for voluntary organisations or £90 for others, plus 10% p&p.

To avoid spamming, an email address is not given on screen. If you can't see the word 'here' or have trouble sending an email by clicking on it, the address is bookservice at, with the spaces and 'at' replaced by the @ symbol.

The information here covers the law applicable to England and Wales. It may not apply in Northern Ireland and/or Scotland. These news items are not a full or definitive statement of the law and are not intended as a substitute for professional legal advice. No responsibility for loss occasioned as a result of any person acting or refraining from acting can be taken by the author.

Chapter 57

The items below formerly appeared on the legal update website for voluntary organisations and are archived here. The content may be out of date and links may not work. For current updates to the chapter, see the legal update website for voluntary organisations at


Added 21/11/10. This information updates chapters 56 & 57 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
As soon as an organisation starts charging for goods or services, it becomes subject to tax on the profit. There are some exemptions for charities, but a charity which trades outside the exemptions can end up in trouble. And any organisation, charity or not, which does not understand the VAT implications of its trading can get in trouble.

It all comes clear in Tax implications of charity trading, published by the Charity Finance Directors' Group in April 2010. Written by Pesh Framjee and the charity tax team at Howarth Clark Whitehill, this 140-page book is clear, detailed and easy to read, and best of all can be downloaded free of charge from the CFDG website via It can also be purchased from CFDG for £15.

Its 12 chapters cover introduction; basic tax exemptions; business sponsorship; trading companies; shops and cafes; merchandising; events; providing services; training and conferences; other areas (overseas operations, rental income/lettings, sports facilities, property sales, and gift aid admission to premises); cost allocation, transfer pricing and loss making trades; and social enterprise.


Updated 3/1/11. This information updates ss.57.2.1 & 57.8.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 4 January 2011 the standard rate of VAT went up from 17.5% to 20%. Organisations which cannot recover VAT will end up paying an extra 2.5% on standard-rated goods and services.

Organisations which are registered for VAT must have systems and procedures in place to charge 20% VAT on standard-rated goods and services provided on or after 4 January. Organisations which use the VAT fraction of 7/47 to calculate VAT must from 4 January use the new fraction 1/6.

Guidance on how to deal with goods or services supplied before 4 January but invoiced after that date, continuous supplies of services, the flat rate scheme, the monthly payments on account scheme, and other specific issues is available via

HMRC's detailed guidance, via covers, amongst other topics, how to deal with subscriptions to clubs and associations where the membership year spans 4 January 2011 (s.9.3), fuel scale charges (s.7.1) and partial exemption (s.7.2).

Zero-rated, reduced-rated or exempt supplies are not affected by the increase in standard rate.

From 1 April 2010 the VAT registration threshold was increased from £68,000 to £70,000 in any 12-month period, and the deregistration threshold went up from £66,000 to £68,000.


Updated 12/2/12. This information updates s.57.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
For VAT accounting periods starting on or after 1 April 2012, every VAT-registered organisation must file its VAT returns online and pay VAT electronically. This completes the process which started on 1 April 2010, when VAT-registered organisations with VAT-exclusive annual turnover of £100,000 or more, and all organisations regardless of turnover registered on or after that date, had to file and pay online.

There are two exceptions to the obligation to file returns and pay electronically: organisations which are subject to an insolvency procedure, and organisations which are run by practising members of a religious society or order whose beliefs are incompatible with the use of electronic communications.

HMRC is contacting all VAT-registered organisations who will be required to file and pay online from 1 April 2012, and recommends that they register for the online service well before their next date for filing a return or paying, to become familiar with the service before they are required to use it. To register go to and click on Register in the New user section. HMRC's IT services will be upgraded in early April, so the VAT online service may not be available for a few days in early April.

Information about electronic returns and ways to pay electronically is available at and Options for paying electronically are at

The Value Added Tax (Amendment) Regulations 2012, amending part 5 of the Value Added Tax Regulations 1995, are at

HMRC announced in March 2011 that from 1 August 2012 it would be compulsory to register for VAT, deregister and report changes to registered details online. Following consultation on this from 8 August to 31 October 2011, the government announced that it would not be compulsory at this time to register, deregister of change details online. The consultation document can be accessed via, with a summary of the responses at


Added 20/4/10. This information updates s.57.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 April 2010 anyone issuing an invoice that includes VAT, when they are not registered for VAT or are not entitled to charge it for another reason, will be subject to a new VAT wrongdoing penalty. The penalty is a percentage of the amount charged as VAT on an unauthorised invoice. Information about the wrongdoing penalty is at


Updated 12/2/12; links updated 3/3/12. This information updates s.57.6.4 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Where a service is provided from a supplier in one country to a consumer in another country, the service is usually subject to VAT where the supplier belongs. A consumer in this context is an individual, or a charity or other organisation which does not provide any goods or services which are business activities for the purposes of VAT. Services provided to a consumer are called B2C (business to consumer).

Until 31 December 2009 this place of supply rule also applied to the provision of services to businesses (including charities and other voluntary organisations which provide any goods or services classed as business activities under VAT rules). Such services are called B2B. But from 1 January 2010, the place of supply for many (not all) B2B services is the country where the recipient/customer belongs, rather than the country of the supplier, and is subject to reverse charge rules under which the customer is in effect treated for VAT purposes as both the supplier and the customer.

The effect is that services provided from outside the UK to businesses/organisations in the UK no longer have VAT added to them by the supplier. If the recipient is registered for VAT, it accounts for input VAT (on services it receives) and also output VAT (on services treated as if the organisation supplied them) — in other words, it charges itself output tax, and then recovers, as input tax, the VAT it has charged itself. (I'm sure it makes sense to someone, but it doesn't to me.)

This is all very complicated and I don't even pretend to understand the logic behind it, but if you think it applies to you, read the briefing from Sayer Vincent at, and HMRC's detailed guidance in notice 741A at If you still think it applies, take advice immediately from an accountant who specialises in VAT for voluntary organisations.

Further changes to the B2B rules apply from 1 January 2011 to supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services. From 1 January 2011 these supplies, when made to a business rather than a consumer, are taxed where the recipient/customer belongs. However, admission to cultural, artistic, sporting, scientific, educational and entertainment events, and services such as cloakrooms which are ancillary to events, will continue to be taxed where the event takes place regardless of whether the customer is a business or a consumer. This includes admissions covered by subscriptions or season tickets.

Brief information about this change is at


Updated 12/2/12. This information updates s.57.9.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Many VAT-registered organisations provide non-business and/or exempt supplies as well as taxable supplies. In this situation, VAT on goods and services which are used to make exempt supplies cannot in general be recovered, but there is an exception if the amount of input tax relating to the exempt supplies is de minimis (basically, so small it's not worth bothering about).

A VAT-registered organisation within the de minimis limit can recover the VAT it has paid on goods or services used to make the exempt supplies. The VAT can be recovered if input tax relating to exempt supplies in the tax period does not exceed the de minimis limit of £625 on average per month, and is no greater than half the total input tax in the period, although in some cases the organisation can determine whether it is within the de minimis rules for a VAT period without having to carry out a partial exemption calculation for the period. An annual adjustment is always required at the end of the tax year to even out variable exempt activity during the year.

Full details on all aspects of partial exemption are in VAT notice 706, updated in June 2011, at The updated guide includes simplification of the standard method of calculating VAT and the de minimis rules, the combined business/non-business and partial exemption (PE) method, and changes to the capital goods scheme (CGS) and clawback/payback rules.

HMRC launched in February 2011 an online toolkit on partial exemption, consisting of a checklist with explanations. This complements toolkits on input tax and output tax. The partial exemption toolkit can be accessed via The toolkits are intended for tax agents and advisors but can be used by individuals and organisations.


Added 12/2/12. This information updates s.57.10.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 January 2012 HMRC has had to withdraw two extra statutory concessions, on the provision of adapted motor vehicles and boats for disabled people, that went beyond what was allowed under EU law.

One arrangement allowed a motor vehicle supplied to a disabled wheelchair user to be treated as a zero rated supply, if the vehicle was adapted soon after it was supplied to the disabled person. This no longer applies. However, VAT zero rating still applies on motor vehicles that are adapted before the vehicle is supplied to a disabled wheelchair user, provided all the other qualifying conditions for zero rating are met.

Information about the withdrawal of the concession on parts and accessories supplied soon after an adapted motor vehicle is supplied is in HMRC brief 41/11 at Details (not updated to reflect this change) and the declarations to claim zero rating are in HMRC notice 701/59 Motor vehicles for disabled people at

Similarly, parts and accessories designed solely for use in or with boats that are designed or permanently and substantially adapted for use by a disabled person or for use by a charity that makes them available for disabled people, are not eligible for zero rating. Zero rating continues to be available on supplies of boats that are designed or substantially and permanently adapted for the domestic or personal use of disabled persons, parts and accessories that are used in connection with repairs or maintenance to qualifying boats, and parts and accessories that are included as part of the single supply of qualifying boats.

Information about the withdrawal of the concession on parts and supplies for adapted boats is in HMRC brief 42/11 at Details (not updated to reflect this change) and the declarations to claim zero rating are in HMRC notice 701/7 VAT reliefs for disabled people at


Added 20/4/10. This information updates s.57.10.6 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 April 2010 the provision of education and vocational training that is ultimately funded by the Young People's Learning Agency and the Skills Funding Agency is exempt from VAT. This continues the exemption that applied to training funded by the Learning and Skills Council.

From 11 March 2010, the VAT treatment of education and vocational training provided by a subsidiary trading company owned or controlled by a university is treated as exempt, in the same way that education or training provided by the university itself would be exempt. This change applies only to companies that are owned or controlled by a university, provide university-level education leading to a qualification awarded by a university or a nationally recognised body, and have close academic links with their parent university.

Details of the new provisions for university subsidiary trading companies are in Revenue & Customs brief 09/10 at and VAT information sheet 03/10 at


Added 15/2/12. This information updates s.57.10.8 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Under the Value Added Tax Act 1994, supplies (activities, services or facilities) closely linked to and essential to sport or physical education are exempt from VAT if they are provided by a non-profit making body to individuals taking part in sport or PE — but if the organisation operates a membership scheme, they are exempt only when provided to members.

Bridport and West Dorset Golf Club charged green fees to non-members who wanted to play golf. It brought a case against HMRC, arguing that by requiring fees charged to non-members to be standard rated rather than exempt from VAT, UK law did not correctly implement the EU principal VAT directive. The first-tier tribunal, in its decision on 1 June 2011, agreed with this argument.

In Revenue & Customs brief 30/11 on 27 July 2011, HMRC said the first-tier tribunal decision applies only to the Bridport and West Dorset Club. Any other golf clubs which do not charge VAT on non-members' green fees will, it said, be assessed for the undeclared tax, and any claims to recover VAT on non-members' fees will be rejected.

HMRC is appealing to the upper tribunal. VAT specialists are encouraging golf clubs which believe they have overpaid VAT to HMRC to submit a claim, despite HMRC's announcement that claims will be rejected at this stage.

HMRC brief 30/11 can be accessed via

The decision in Bridport and West Dorset Golf Club Limited v Commissioners for HM Revenue and Customs is at

In a separate case, the European Court of Justice (which even HMRC can't argue against) ruled in Canterbury Hockey Club that supplies that were standard rated because they were supplied to an organisation rather than an individual became exempt from VAT from 1 September 2010, if the body to which they are supplied is non-profit making and the true beneficiaries are individuals taking part in sport. This includes affiliation fees charged by sports governing bodies to member clubs, supplies provided by one club to other clubs for the use of their members, and supplies provided to other non-profit corporate bodies or unincorporated organisations for the use of their members or other individuals.

HMRC notice 701/45 was updated in August 2011 to reflect this change. The notice is at

The ECJ decision in Canterbury Hockey Club and Canterbury Ladies' Hockey Club v Commissioners of HM Revenue and Customs is at

For summaries and articles about cases, do a Google search on key words in the case name or content.


Added 15/2/12. This information updates s.57.11.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
The sale, hiring out or export of donated goods by a charity, or by an individual or organisation which has a written agreement to transfer all the profits to a charity, is zero rated. The goods must be offered for sale or hire either to the general public, or exclusively to people with disabilities or people receiving means-tested benefits. Other sales or hire of donated goods are standard rated.

Furniture Finders of Winsford sold donated goods and electrical items at low prices, primarily but not exclusively to people on low incomes. It was set up as a company limited by guarantee, but its objects as worded were not exclusively charitable and it was not registered with the Charity Commission. One of its founders told the tribunal he had explicitly not registered as a charity because he did not want it "to be a cap-in-hand group drawing money from others", but that Furniture Finders was "from head to toes a charitable organisation", should be recognised as such by HMRC, and should be able to sell donated goods at zero rate rather than standard rate.

HMRC argued that the provision in the Value Added Tax Act allowing HMRC to recognise organisations as charitable was intended for organisations with exclusively charitable objects which were exempt from registering with a charity regulator. It was not intended to allow HMRC to recognise organisations as charitable if they would not have been eligible for registration with the regulator. Furthermore, Furniture Finders sold second-hand furniture to the public, which could include people who were not on a low income or people who were buying with the intention of reselling the furniture.

Not surprisingly, the tribunal ruled in favour of HMRC.

This case is important for community interest companies (which by definition are not legally charities, even if their objects and activities are wholly charitable), other organisations which define themselves as social enterprises but are not legally charitable, and companies limited by guarantee and unincorporated associations which see themselves as charitable and whose activities may be exclusively charitable, but whose objects are not. When setting up an organisation, it is important to be aware of the tax and VAT reliefs that will be available only if the organisation's objects are wholly and exclusively charitable and it meets the other criteria for being legally a charity.

Furniture Finders of Winsford now operates as Furniture Finders of Cheshire, the retail arm of Changing Lives in Cheshire Ltd, a registered charity.

The first-tier tribunal (tax) decision in Furniture Finders of Winsford Ltd v Commissioners of HM Revenue and Customs is at

For summaries and articles about cases, do a Google search on key words in the case name or content.


Added 3/1/11. This information updates s.57.12.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
VAT zero rating applies to all advertisements placed by a charity in any media and services connected with the design and production of the advertisement, but only if the advertising is in the someone else's — not the charity's — publication, website, time or space. HMRC's view in the past was that pay-per-click (PPC) sponsored links on search engine websites were not eligible for zero rating, because they linked through to the charity's own website. In June 2010 HMRC revised its approach, and said that such links, along with associated copywriting and design services, are eligible for zero rating when supplied to a charity. Details are in HMRC brief 25/10 at

Search engine optimisation services provided by copywriters and designers (structuring a website so that it contains as many keywords as possible) remain standard rated, because HMRC considers that the purpose of these is to optimise the charity’s own website.


Added 12/2/12. This information updates s.57.12.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
The supply of books and other printed materials is generally zero rated for VAT. This is advantageous to all purchasers of printed materials, not just those who are registered for VAT.

Leaflets are zero rated if at least 50 are supplied, but lose zero rating if any portion intended to be completed, detached and returned takes up more than 25% of the whole leaflet. Until October 2010 written consent could be sought from HMRC's national advice service for zero rating even if the portion to be completed, detached and returned took up more than 25%, but the possibility of obtaining this consent was ended at that time.

Since then, zero rating has been available for leaflets, brochures and pamphlets only where 25% or less of their total area consists of areas which are blank and available for completion or parts to be detached and returned. Where there is both an area for completion and a part to be detached and returned, the two together must not exceed 25% of the total area of the publication.

Zero rating applies to preparation of the artwork, typesetting etc when these are provided by the supplier of the item itself, but if they are provided by anyone else they are standard rated.

Details are in notice 701/10, updated in December 2011, at


Added 3/1/11. This information updates s.57.13.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Where an employee is employed by two organisations (for example a charity and its trading company) on a joint contract of employment, but one organisation pays the employee and recharges the other organisation for its share of salary and linked costs such as tax and national insurance, the recharge for salary etc is outside the scope of VAT, so VAT does not have to be charged on it. (However, if a management fee is charged, this is subject to VAT at standard rate.)

A recent case involving IT workers showed that even where employees are hired on joint contracts of employment, VAT may in some cases be payable on the salary recharge. In CGI Group (Europe) Ltd v HMRC, the upper tribunal (finance and tax) found that the charge by one employer to the other was not actually a recharge for salary costs, but was a charge for the supply of IT services — which are subject to VAT.

The decision is at
This was a complicated case, in which Cox Services Ltd, an insurance company, outsourced its IT department to CGI Group. Cox's employees transferred to CGI under TUPE (the transfer of undertakings regulations), but CGI immediately offered — and the employees accepted — joint contracts of employment with both CGI and Cox. CGI and Cox had a detailed service agreement for the work to be done, and how it would be charged. CGI paid the employees' salaries and recharged Cox. The tribunal agreed that there were joint contracts of employment but despite this, the agreement between CGI and Cox was a contract under which CGI provided IT services to Cox — and these services were subject to VAT.

Where an employee on a joint contract genuinely works for both organisations and is managed by each for the work done for it, a salary recharge by one organisation to the other is outside the scope of VAT. But where one of the employers manages the employee not only for its own work but also for the work of the other employer, or where the two employers have an agreement under which the joint employee will while working for one employer supply services to the other, VAT may be an issue. Organisations which may be in this or a similar situation should take advice from their solicitor or accountant.

Information about VAT on the supply of staff, including secondments and staff on joint contracts, is in HMRC notice 700/34 via


Updated 18/2/12. This information updates s.57.13.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
In its decision on 24 March 2011 in Reed Employment Limited, on a convoluted series of claims and appeals covering the period from 1973 to 1996, the first-tier tribunal (tax) said that Reed, as an employment agency supplying temporary workers, only had to charge VAT on its administration fee (which might also be called an introduction fee or commission), and not on the salary costs, national insurance and related costs charged to the hirer. This is potentially good news for organisations which hire agency temps and are not registered for VAT and therefore cannot recover VAT, or are registered for VAT but partially exempt and can only recover part of the VAT.

However, in Revenue and Customs brief 32/11 on 24 August 2011, HMRC said that as a judgment of the first-tier tribunal, this decision applies only to Reed and does not set a precedent, and in any case applies to historic claims. HMRC pointed out that in another decision, Hays Personnel Services, the tribunal had found that VAT was due on the full amount paid by the hirer to the agency.

Interestingly HMRC chose not to appeal the Reed decision. Had it appealed to the upper tribunal and lost, a legally binding precedent would have been set that VAT was payable only on the administration fee. By not appealing, HMRC can continue to treat the Reed decision as an isolated case.

However some VAT specialists believe the decision is more widely applicable, enabling organisations which could not recover VAT, or could recover only part of it, to recover VAT paid to employment agencies for temps' salaries and related costs back to 1 April 2009. (From 1997 to 31 March 2009, an HMRC concession was in place under which agencies VAT did not have to be charged it on salary and related costs. The concession was withdrawn on 1 April 2009.) They are encouraging organisations which have not been able to recover VAT to claim from their employment agency the unrecoverable VAT they have paid for salaries etc since April 2009, ask their agency to charge VAT only on their administration fee in future, and encourage their agency to challenge HMRC's interpretation of the Reed decision.

The decision could also have implications for organisations which provide their own staff to other organisations, then charge the receiving organisation for the employee's salary plus national insurance and related costs. Organisations which supply staff to other organisations and recharge them, or organisations which receive staff from other organisations and pay the providing organisation for the employee's salary etc, should take advice from their accountant.

VAT notice 700/34 Staff, and VAT info sheet 03/09 set out the rules on the supply of staff, and can be accessed via and Brief 32/11, giving HMRC's position on the Reed decision, is at

The decision in Reed Employment Limited v The Commissioners for HM Revenue and Customs is at

For summaries and articles about cases, do a Google search on key words in the case name or content.


Added 12/2/12. This information adds a new section between s.57.13.1 & 57.13.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 January 2012, salary sacrifice schemes involving, for example, shop vouchers, cycle to work schemes, gym membership or other benefits in lieu of salary are subject to VAT. This means that employers will, as before, have to pay input VAT when they purchase standard rated benefits, and if VAT-registered will be able to recover the input VAT. But following a European Court of Justice decision, employers now also have to account for output VAT when they give the benefits to employees — thus cancelling out the input VAT they can recover.

Salary sacrifice schemes have been seen as being advantageous to employers, because they have been able to recover their input VAT, and have not had to pay employer's national insurance contributions (NICs) if the benefit is exempt from NI. Employees receive lower pay so pay less tax (though some of the benefits may be taxable, so there is little or no saving), and do not pay employee's NICs on the sacrificed salary. However, a salary sacrifice scheme is a permanent contractual change, unless the contract is changed again. It leads to a lower salary which can have long-term implications for state pensions, private pension contributions, working or child tax credits, and earnings-related welfare benefits. It may thus not be very advantageous for employees. General (not VAT-related) information about salary sacrifice schemes can be accessed via

In the European Court of Justice VAT case, Astra Zeneca v HMRC, Astra Zeneca provided retail vouchers to employees who chose to participate in a salary sacrifice scheme. Astra Zeneca could recover the input VAT it paid when it purchased the vouchers. HMRC argued that by giving up salary to receive the vouchers the employees were providing consideration (money or something else of value) in return for the vouchers, making the employer's supply of the vouchers subject to output VAT. Astra Zeneca had argued that provision of vouchers in place of salary did not equate to the employee paying for the vouchers, and was therefore not subject to output VAT.

In its decision in July 2010, the ECJ accepted the HMRC view, saying, "... the provision of a retail voucher by a company, which acquired that voucher at a price including value added tax, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration."

HMRC briefs 28/11 of 28 July 2011 at, and 36/11 of 3 October 2011 at, set out how this is being implemented from 1 January 2012. These arrangements are too complex to summarise here, because they depend on:

  • whether the arrangement is one where the employee pays for the goods or services via deduction from salary (an arrangement on which output tax has always been payable), or is genuinely salary sacrifice (a contractual arrangement which has a specific legal meaning, and which HMRC has treated as not being subject to output VAT);
  • whether the salary sacrifice scheme was in place before 28 July 2011 or was entered into on or after that date;
  • the nature of the benefits provided to the employee, with specific rules about output VAT for cycle to work schemes, face value vouchers, childcare vouchers, food and catering provided by employers, and company cars.
The change could also have significant implications if the employer is not registered for VAT, but the value of the salary sacrifice benefits provided to employees is enough to take its turnover for VAT purposes over the VAT registration threshold (currently "73,000 in any 12-month period).

The ECJ ruling in Astra Zeneca UK Ltd v Commissioners for HM Revenue and Customs is at

For summaries and articles about cases, do a Google search on key words in the case name or content.


Updated 12/2/12. This information updates s.57.13.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 2 April 2012 bulk mail and a number of other Royal Mail services will become subject to standard rate VAT. This affects all users of postal services, especially those who are not registered for VAT and will not be able to recover the extra VAT they will have to pay, or are registered but partially exempt and will be able to recover only part of the extra VAT.

The imposition of VAT is separate from increases in the price of postage, which are also expected to come into effect in April. Proposed increases in the price of business mail are expected to be announced in late February, and proposed changes to the universal service in mid to late March. The universal service includes those services which Royal Mail guarantees it will deliver to any address in the UK for the same price: 1st and 2nd class stamped and metered mail, standard parcels, and special delivery. When available the prices will be at

Royal Mail services that will remain exempt from VAT include universal services [see paragraph above], poste restante, non-contract international airmail and surface mail, and redirections. Royal Mail's charges to "downstream access operators" for standard and large letters will remain exempt; a decision is awaited from Ofcom, which since the demise of Postcomm regulates postal services, whether this will be extended to include packets. A downstream access operator is a competitor to Royal Mail, such as TNT, DHL or UK Mail, which collects and distributes mail but then delivers it to Royal Mail for distribution to local delivery offices and final delivery.

Products and services which will become liable to VAT from 2 April 2012 include:

  • all bulk mail services: Mailsort, Cleanmail, Walksort, Presstream, Sustainable Mail, Advertising Mail, including if they are metered;
  • Packetpost, Packetsort, Response Services, PO Box Services;
  • 1st and 2nd class standard tariff account mail, automated standard tariff account large letters;
  • Royal Mail's charges to downstream access operators for all services except standard and large letters (and packets if Ofcom says they are also exempt).
Full details of which services will and will not be subject to VAT are at The Direct Marketing Association issued on 9 February 2012 a useful briefing about the implications of the changes for organisations that use bulk mail, at

This VAT change in April follows the change on 31 January 2011, when some postal services provided by Royal Mail became standard rated for VAT, including door to door unaddressed mail, Parcelforce, 9am special delivery (but not next-day special delivery), mailroom services, and services provided on terms and conditions negotiated with a customer.


Added 3/1/11. This information updates s.57.13.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 31 January 2011 some postal services provided by Royal Mail will become standard rated for VAT. The public postal service, and goods and services which the Royal Mail has a statutory duty to provide (including providing postal facilities to private postal providers) remain exempt from VAT. But other Royal Mail services will become subject to VAT, including door-to-door unaddressed mail, Parcelforce, 9 a.m. special delivery (but not next-day special delivery), mailroom services, and services provided on terms and conditions negotiated with a customer. Organisations which have bulk postal agreements with Royal Mail or other providers may lose their exemption.

Organisations which may be affected by this change should read the HMRC technical notice on postal services, available via, and take advice from a solicitor or accountant.

On the positive side, organisations with individually negotiated agreements with the Royal Mail may be able to claim repayment of VAT back to 1 April 2006. Even though VAT was not charged, it may be possible to deem the agreed price as having been VAT inclusive. Details are in HMRC brief 19/10 at


Added 3/1/11. This information updates s.57.13.4 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Charities registered for VAT may be able to reclaim some VAT on investment management fees. In a test case brought by the Nuffield Foundation, HMRC said in 2009 that charities can recover — both retrospectively and in future — the portion of the fee that relates to investment income used for the charity's activities which are subject to VAT. The fee on the portion of investment income used for exempt activities is not recoverable. Where restricted or endowment funds that can only be used for specific purposes are invested, VAT can be recovered only in relation to activities subject to VAT which are permitted within the restricted purposes.

HMRC said in November 2009 that it would issue a briefing explaining this change, but as of early January 2011 I have not been able to find anything on its website or in any relevant publication. Organisations which want to take advantage of this change should take advice from a solicitor or accountant.


Updated 12/2/12. This information updates s.57.13.5 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Where road fuel is purchased by a VAT-registereed organisation and provided to employees or others for private use, the organisation cannot recover VAT on the portion used for private purposes. The amount that cannot be recovered can be based on the actual proportion used for private purposes, or on a fixed fuel scale charge which is set each year by HM Revenue & Customs and is based on the vehicle's CO2 rating.

For VAT accounting periods starting on or after 1 May 2011 new fuel scale charges came into force, reflecting changes in fuel prices. Details can be accessed via tinyurl.4yy9boo.

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Go to archived items about VAT (VSLH3 chapter 57)


Updated 1/4/12. This information adds a new s.57.13.7 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Following formal and informal consultation, HMRC issued in August 2012 its final guidance on the VAT cost sharing exemption. Although only issued in August, the guidance came into effect on 17 July 2012.

Article 131(f) of European Union directive 2006/112/EC, the principal VAT directive, allows exemption from VAT for the supply of services by:

  • "independent groups of persons [individuals, businesses and organisations],
  • who are carrying on an activity which is exempt or in relation to which they are not taxable persons [i.e. the activity is exempt from VAT or defined as non-business in VAT law],
  • for the purpose of rendering their members the services directly necessary for the exercise of that activity,
  • where those groups merely claim from their members exact reimbursement of their share of the joint expenses,
  • provided that such exemption is not likely to cause disruption of competition."
The EU cost sharing exemption has been mandatory since 1978 but the UK is only now implementing it. The sudden desire to implement an EU directive is, as exchequer secretary to the Treasury David Gauke told a Commons debate on VAT and hospices in May 2012, a way of "ensuring that VAT does not act as a barrier to the reform of public services".

The exact wording of the EU provision is replicated in the Finance Act 2012 s.XX, which came into effect on 17 July 2012 and inserts a new group 16 to schedule 9 of the Value Added Tax Act 1994. The detail of how the exemption will operate is in the new guidance.

Prior to the exemption, if an umbrella organisation was set up for the purpose of obtaining or providing services to the group's members — typically IT, HR or payroll services, but it could be any services — the shared services would normally be subject to VAT. If the umbrella group's turnover was more than the VAT registration threshold (currently £77,000 in any 12-month period), it would have to register for VAT and charge VAT to its members. If those members were not themselves registered for VAT they would not be able to recover the VAT they paid for the services. Or if they were registered for VAT but partially exempt, they would only be able to recover part of the VAT. This disadvantaged charities and other voluntary organisations, universities, further education colleges, residential care homes and housing associations — as well as banks, insurance businesses and health and welfare businesses, many of whose activities are exempt from VAT.

But now, if the umbrella organisation meets the criteria in the cost sharing exemption, it is a cost sharing group (CSG) and there is no VAT charge on shared services supplied by the group to its members. However, for the reasons set out below, many commentators believe that the exemption is so complex that it will deter many of the organisations it was intended to help.

Because the CSG has to be an "independent group of persons", it must have at least two organisations as members, and these must be independent from each other or at arm's length. The CSG itself must be separate from its members, and capable of being registered for VAT if it makes taxable supplies. The need to set up a separate organisation — or even a range of organisations, if a member is to purchase a range of shared services — could make the exemption too onerous for small organisations, and could create problems such as TUPE.

Each member of the CSG must have an ownership involvement with the CSG (normally through share ownership in a company limited by shares), and no one can have such ownership involvement if they are not a member of the group. HMRC's initial view was that the CSG as a separate organisation had to be set up in a way that no one member had majority control, but in its guidance HMRC has accepted that it can be majority owned or controlled by one member, if the other members agree.

To be eligible to be a member of a CSG, and organisation must be "carrying on an activity which is exempt or in relation to which they are not taxable persons". The HMRC guidance says an organisation meets this requirement if at least 5% of its activities are exempt and/or non-business (for VAT purposes.

Although the EC directive and the Finance Act say the CSG's purpose must be to provide its members with services directly necessary for the exercise of their exempt or non-business activities. HMRC's guidance is that all supplies received by a member from a CSG can be treated as directly necessary if the member's activities are wholly exempt or non-business, or where exempt and non-business activity constitutes 85% or more of the member's activity. Where exempt and non-business activities are less than 85% of the member's total activity, the proportion of the CSG services that is "directly necessary" would be determined by a partial exemption method. The guidance includes information on how a CSG can ensure the 85% test is being met.

A separate issue is that shared services are often back office functions such as IT, HR and payroll. It could be argued that such services are overheads and not directly necessary for the provision of education, health care or other exempt or non-business activities. HMRC does not take this view.

If members of a CSG supply services to each other or a CSG supplies services to non-members, these will not qualify for the exemption and will be subject to normal VAT rules.

Although a CSG can claim from its members only "exact reimbursement of their share of the joint expenses.", HMRC accepts that expenses include both the direct costs of providing a service, and indirect costs (overheads). Although a CSG can make no profit whatsoever, HMRC believes that building up a cash surplus as a reserve or for contingencies would not contravene this requirement provided any surplus is held solely for future use by the CSG for the specific benefit of members. Reserves could be held, for example, for future capital purchases or as a credit for future purchases by members who have paid in advance.

There is little EU case law about the cost sharing exemption, and it has been implemented in a variety of ways in other member states. The European Commission is increasingly concerned about this lack of consistency, so any approach implemented in the UK is potentially open to challenge.

This may be even more likely since the European Commission issued on 26 January 2012 a reasoned opinion, the second stage in infringement proceedings, challenging Luxembourg's interpretation of "directly necessary". Luxembourg allows exemption for all services provided to a member of a CSG provided its taxable activities do not exceed 30% of its total activities (or to phrase it so it is comparable to HMRC's proposal for the UK, all services provided by the CSG are treated as directly necessary if the member's exempt and non-business activities are at least 70% of its total activity).

The case may be referred to the European Court of Justice if Luxembourg does not amend its law within two months. Commentators have suggested that acceptable amendments might be reducing the portion of allowed taxable activity to 5% (i.e. requiring 95% of activity to be exempt or non-business, rather than 70% as currently in Luxembourg or 85% as proposed in the UK), or requiring, in all cases where a member's activities are not 100% exempt or non-business, a fact-based assessment of whether the services received from the CSG are directly necessary for the member's exempt and non-business activities.

Even if these technical issues can be resolved, there is the reality that a cost sharing group will involve governance and administrative time and costs, as it will be a separate organisation with its own constitutional and compliance requirements, employment responsibilities, etc. There will also be complex issues such as TUPE and pension rights if staff are transferred from a member organisation to the CSG.


Added 3/1/11. This information updates s.57.14.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Where a new self-contained building will be used for a "relevant residential purpose" or "relevant charitable purpose" as defined under VAT law, VAT zero rating is available for services purchased in the course of construction (but not the separate services of architects, surveyors or persons acting as consultants or in a supervisory capacity); materials, hardware and other goods provided as part of the zero-rated services; and the sale of the freehold or the grant of a lease for a period exceeding 21 years.

Zero rating was available until 30 June 2010 even if the building was partly used for purposes that were not relevant charitable purposes, provided that at least 90% of the building was used solely for relevant residential or charitable purposes, and provided that by 1 January 2011 either the building was constructed to a point above foundation level, or the charity was in occupation of the building if it was being acquired or leased. From 1 July 2010, or where the 1 January 2011 rules have not been met, the 90% proportion is increased to 95%.

Information about these changes is in HMRC briefs 26/10, 32/10 (an updated version of 39/09) and 33/10, at, and


Added 20/4/10. This information updates s.57.15.3 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Rent is generally exempt from VAT, but a landlord or property owner can choose to charge VAT on rent. This is called the option to tax. If an option to tax is in place, all supplies relating to those premises, including their construction or sale, are standard rated rather than exempt.

From 1 April 2010 and 1 May 2010 some of the rules on opting to tax and on revoking the option are changed, including new conditions for revoking an option to tax within the six-month cooling off period. [Note that the cooling off period is incorrectly given as three months in The Russell-Cooke Voluntary Sector Legal Handbook s.57.15.3.]

Basic rules on the option to tax are in HMRC VAT notice 742A ( The April and May changes are in HMRC brief 08/10 ( and VAT information sheets 02/10 ( and 08/10 (

Special rules allow charities, prior to entering into an agreement for the supply of premises where an option to tax is in place, to apply for disapplication (cancellation) of the option to tax. Charities can do this only in relation to non-office premises used for relevant charitable purposes (which are defined narrowly in VAT legislation).

Under new rules announced by HMRC in July 2010, where a building or part of a building is to be used 95% of more for relevant charitable purposes, the customer and supplier can agree that the option to tax will be excluded where:

  • a building or part of a building (other than used as an office) will be used by a charity solely for a relevant charitable purpose;
  • where a grant is made in a building or part of a building designed solely for a relevant residential purpose; or
  • where a grant in a building or part of a building is made to a person who intends to use it solely for a relevant residential purpose.

  • Information about this change is in HMRC brief 33/10 at

    Even if 95% of the premises is not used for relevant charitable purposes, the option to tax can be disapplied in relation to the proportion of the premises that are used for a relevant charitable purpose — so if, for example, 50% of the building is used for a relevant charitable purpose, the charity and the supplier of the premises can agree that 50% of the VAT will be disapplied.

    Charities which wish to apply for disapplication when entering into an agreement for premises should contact HMRC or a specialist in charity VAT for advice.

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