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Tax Authorities Exceeded Powers in Granting Art Charity Tax Break

Agreements reached with public authorities are only worth the paper they are written on if the latter have power to enter into them. The point was made by a case in which HM Revenue and Customs (HMRC) granted a charity a partial VAT exemption that was subsequently shown to be unlawful, in that it contradicted HMRC’s published policy.

The charity, which ran art galleries that offered free entry to the public, in part relied financially on various schemes whereby supporters provided funds in return for the opportunity to partake in exclusive events and offers. After a disagreement arose as to the VAT treatment of those schemes, the charity engaged in an alternative dispute resolution (ADR) procedure with HMRC.

At the end of that process, an agreement was reached with HMRC to the effect that part of the payments made under the schemes would be treated as donations and thus exempted from VAT. It was later found in linked proceedings that VAT was chargeable at the standard rate on all such payments. A tribunal found that there was a single supply of benefits to supporters and that payments made under the schemes could thus not be viewed as donations.

In those circumstances, HMRC changed its position in relation to the past and future VAT treatment of the schemes on the basis that the agreement was inconsistent with its published policy and wrong as a matter of law. The concession was withdrawn and the charity was retrospectively assessed for more than £65,000 in VAT.

In ruling on the charity’s challenge to that decision, the First-tier Tribunal (FTT) found that HMRC had entered into a contract to grant the partial exemption. HMRC’s plea that the agreement arose from a unilateral mistake on its part was rejected. However, in dismissing the appeal, the FTT ruled that HMRC had no lawful power to enter into the contract, which was therefore void.

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