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DEATH AND TAXES

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DEATH AND TAXES: DIE SWAKKE BTW

Readers will, I hope, forgive the weak pun about VAT or BTW.

Members of the profession that relax by playing golf or tennis or succumb to a beer or three at the rugby club are no doubt glad to escape momentarily from the rigours of audit, accounting and
tax matters.

But have they given thought to the fact that VAT at their club may be the weakest vessel and render the club vulnerable to an audit by SARS? Few, if any, sports clubs are unaware of the PAYE tax regulations, but can the same be said of the more complex VAT? For some there can be little doubt that VAT is their weakest link if the evidence of reported UK VAT cases is any guide.

The application of the VAT Act to non-profit organisations can be extremely troublesome, but often the only VAT matter that taxes the mind of the club treasurer is whether or not the turnover of the club exceeds R1 million a year (previously R300 000) and consequently whether the club should register for VAT; or the corollary, whether the club should deregister if the turnover is less than R1 million a year.

The VAT implications for sports clubs are compounded by the fact that the club treasurer is invariably a member that looks after the finances on a part-time basis. He may well be a skilful accountant, but tax reports of VAT cases in Britain, where the legislation in some respects is similar to ours, tell a different story.

Surprisingly, VAT cases are not always dull affairs, as an appeal by The Royal Pigeon Racing Association illustrated. The Association had appealed against a decision by Revenue not to grant it certain exemptions available to sports clubs. The Chairman of the Appeal Tribunal said that to qualify for exemption “…the individual must be taking part in the sport, which we interpret to mean the main sporting activity and not some ancillary activity. Pigeon racing did not qualify for exemption because the only physical activities were undertaken by the pigeons rather than their owners…” Quite so.

In another case, a rugby club levied match fees on each player, which were collected by the team captain and were used to pay the referee’s expenses and to buy refreshments (principally large quantities of beer) for the visiting team. The club did not account for VAT on the amounts collected and Revenue issued an assessment together with penalties. Fortunately, the club captain was a practising barrister, who skilfully and successfully argued that the match fees were entirely voluntary donations outside the scope of the VAT Act. Press reports at the time indicated that, on the evening of the next home game, the police were called following complaints from the neighbours about the rowdy behaviour of the members as they celebrated their legal victory over the tax man.

The club barrister had successfully distinguished his matter from another similar case some thirteen years earlier when the Court held that the annual subscriptions and the match fees together constituted the consideration for the provision of the facilities available to members and their guests.

At times it must be said that sports clubs are the architects of their own misfortune. A rugby club operated a bar during the winter rugby season from September to April each year. During the summer months, the same bar was operated by the local cricket club. A loan account was operated between the two clubs. The rugby club was registered for VAT but the cricket club was not. The rugby club’s treasurer deducted input tax on bar stock that it acquired from the cricket club. This arrangement was discovered by VAT inspectors during a routine inspection, and an assessment with penalties was served on the rugby club. The rugby club treasurer tried to argue, vainly, that the bar stock was second hand and that he was entitled to a deemed input credit.

Now, lest all you amateur sportsmen and sportswomen despair at the intrusion of VAT into the affairs of your club, you may take solace from the fact that even the most learned among us in the profession get things wrong at times.

The Institute of Chartered Accountants in England and Wales made tax history in 1999 when it pursued a VAT appeal all the way to the House of Lords – and lost. (The Institute v Commissioners of Customs & Excise HL (1999) STC 398). The Institute was most aggrieved that it lost in the first court, secondly in the Chancery Division of the High Court, thirdly in the Court of Appeal and, finally, in the House of Lords. The Commissioners had ruled that the work of the Institute in authorising (or ‘licensing’) its practitioners to carry on investment business, insolvency work and audit work was not carried out in the course or furtherance of a business. In consequence, it was not required to account for output VAT on those fees and nor was it entitled to claim the relevant input tax. The other activities of the Institute were not affected by the decision.

The Institute appealed, contending that its licensing functions amounted to a ‘business’ or an ‘economic activity’. The first court, or tribunal, rejected this contention and dismissed the appeal, holding that the relevant supplies were not ‘of a kind which are commonly made by those who seek to make profit from them’, nor were the relevant activities ‘predominantly concerned with the making of taxable supplies for a consideration’. The predominant concern of the licensing activities was ‘the implementation of the statutory policy of protecting the public interest through self-regulation of the relevant practitioners’, and ‘charging fees for investigative and monitoring services is not the predominant concern or characteristic of the activities’.

The Chancery Division of the High Court, the Court of Appeal and The House of Lords all unanimously upheld the Commissioner’s decision. Applying European Community Law and Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen 21.79:  ‘it is not enough merely to point to the fact that there is a supply of services in return for a money payment and some loose economic connection but … the activities must be of an “economic character”.

Lord Slynn observed that the Institute was carrying out a regulatory function, on behalf of the State, to ensure that only fit and proper persons were licensed and authorized to carry out the various activities and to monitor what they did. This was not in any real sense a trading, commercial or economic activity, and the fact that fees were charged for the grant of the licences did not convert it into one. Performing a licensing function on behalf of the State was not a ‘business’.

Penelope Webb who for some years worked in industry, is a former tax partner of a large international accounting firm.