Cairngorms Nation­al Park Author­ity VAT Review

Novem­ber 2023

Updated March 2024

Pre­pared by: Azets

Con­tents

• Back­ground and Scope (Page 2)
• Exec­ut­ive Sum­mary (Page 3)
• Cairngorms 2030 Pro­gramme (Page 4)
• Receipt of Grants (Page 6)
• Con­tracts for Ser­vices (Page 9)
• Use of Grants/​Funding (Page 10)
• VAT Regis­tra­tion (Page 15)
• VAT Recov­ery (Page 16)
• Appendix 1 – Grants vs SLA Indic­at­ors (Page 18)
• Appendix 2 – Addi­tion­al Notes on Recov­ery of VAT Incurred on Expendit­ure (Page 21)
• Dis­claim­er (Page 23)

Back­ground and Scope

Cairngorms Nation­al Park Author­ity (“CNPA”) is a Non-Depart­ment­al Pub­lic Body which derives income from grants mainly from the Scot­tish Gov­ern­ment but also the Nation­al Lot­tery and sim­il­ar bodies.

CNPA is not cur­rently registered for VAT (this hav­ing been con­firmed by HMRC a num­ber of years ago).

Unlike its coun­ter­parts in Eng­land and Wales, CNPA does not hold Sec­tion 33 status for VAT pur­poses. Sec­tion 33 status allows spe­cified bod­ies to recov­er VAT with regard to their non-busi­ness (free of charge) activities.

Azets have been asked to carry out a review and provide guid­ance on the Cairngorms 2030 Programme.

Scope of our work

As set out in our pro­pos­al in Septem­ber 2023 and our engage­ment let­ter of 17^th Octo­ber 2023, this report will review and provide guid­ance on:

• Poten­tial VAT regis­tra­tion require­ments for CNPA or any part­ner­ships with­in the agreed projects
• Poten­tial for VAT recov­ery on cent­ral and pro­ject costs
• Identi­fy­ing risks in pro­ject agree­ments going for­ward and recom­mend­a­tions on how to lim­it these risks
• Avoid­ing VAT risks in contracts

We were provided with, and reviewed, the fol­low­ing documents:

• Board paper dated 23 June 2023 in rela­tion to the Nation­al Lot­tery Her­it­age Hori­zons Fund delivery
• Cairngorms 2030; Cost Plan 2024 – 28
• Devel­op­ment Grant Noti­fic­a­tion letter
• Cairngorms 2030; Full Pro­gramme report
• Appendix D; Deliv­ery Phase Cost Plan
• Appendix D; C2030 Cost Plan

Our views and com­ments are based on the inform­a­tion provided by CNPA and takes into account cur­rent VAT law, pre­ced­ents and HMRC guidance.

Exec­ut­ive Summary

Based on our review of the inform­a­tion avail­able to us, at this stage, we have not iden­ti­fied that CNPA is under­tak­ing any tax­able sup­plies as a res­ult of this Pro­gramme. How­ever, at this stage, any poten­tial VAT risks are often unknown. VAT risks are more likely to appear at the point of agree­ments being draf­ted or dif­fi­culties arising in the pro­jects which need to be resolved. We have not seen any pro­ject con­tracts (they may not exist at this time) and so we can­not com­ment on spe­cif­ic poten­tial issues at this time. The find­ings below are risks that we believe (based on our review of sim­il­ar organ­isa­tions) CNPA may need to con­sider as the pro­jects pro­gress, although we have high­lighted some poten­tial examples based on the pro­ject descrip­tions in the doc­u­ments provided. There is more inform­a­tion provided for each of these con­clu­sions later in this paper.

• The receipt of grants by CNPA will be out­side the scope of VAT.
• The NLHF agree­ment is a grant and there­fore the fund­ing received is out­side the scope of VAT.
• CNPA is not cur­rently registered for VAT and receipt of the NLHF fund­ing will not cre­ate a require­ment to register for VAT. How­ever fur­ther review of the future pro­ject agree­ments may identi­fy a future require­ment to register. Examples of risk areas include any income gen­er­ated from pro­jects such as E‑bike hire income, or work on third party land where con­sid­er­a­tion is received. Also, CNPA may have a his­tor­ic require­ment to register which has not been con­firmed. If his­tor­ic regis­tra­tion is required, CNPA may be liable to a late regis­tra­tion pen­alty charge from HMRC.
• As and when CNPA either makes an applic­a­tion for fund­ing for the Pro­gramme or an agree­ment is entered into, the agree­ment should be reviewed in order to determ­ine its VAT liab­il­ity as CNPA may be involved in both giv­ing and/​or using grants and enter­ing into con­tracts for goods/​services agreements.
• We would recom­mend that a ​‘check­list’ which details poten­tial VAT risks is draf­ted and that each pro­ject agree­ment CNPA enters into is reviewed against the check­list before the agree­ment is signed to ensure the VAT risks are con­sidered. Also, the check­list should be used to review any mater­i­al changes to agree­ments or struc­tures mov­ing forward.
• Going for­ward CNPA may, by enter­ing into col­lab­or­at­ive agree­ments, cre­ate a new deemed part­ner­ship which will carry its own VAT regis­tra­tion and recov­ery issues. Such col­lab­or­at­ive agree­ments should be assessed against the Check­list above.
• VAT recov­ery on this Pro­gramme can only occur where CNPA is registered for VAT and ulti­mately to the extent that CNPA under­takes tax­able activities.

We would wel­come the oppor­tun­ity to dis­cuss our find­ings and the next steps with CNPA and its Board.

Cairngorms 2030 Programme

Back­ground

The Cairngorms 2030 Pro­gramme con­sists of the deliv­ery of the fol­low­ing 20 pro­jects across four themes:

1. Wood­land Expansion
2. Peat­land Restoration
3. Nature Recov­ery
4. Cairngorms Future Farming
5. Cli­mate Resi­li­ent Catchments
6. Green Fin­ance and Com­munity Wealth
7. Well­being Economy
8. Pub­lic Health and the Outdoors
9. Demen­tia Activ­ity Centre
10. Land­scape and Communities
11. Effect­ive Com­munity Engagement
12. Cli­mate Learn­ing and Education
13. Cli­mate Con­scious Communities
14. Com­munity Arts & Cul­ture Programme
15. Com­munity Man­aged Grant Scheme
16. Research and Know­ledge Exchange
17. Cycle Friendly Cairngorms
18. Act­ive Travel Communities
19. Sus­tain­able Transport
20. Travel Beha­viour Change

The deliv­ery phase will run from Janu­ary 2024 to Decem­ber 2028 and has been cos­ted at £42.3 mil­lion. There are almost 20 fund­ing part­ners, the largest being Peat­land Action (£12 mil­lion), NLHF (almost £11 mil­lion), Sus­trans Scot­land (over £4 mil­lion), Scot­tish Forestry Grant Scheme (£4 mil­lion) and the Park Author­ity (£2.75 mil­lion) with a fur­ther £3 mil­lion in Park Author­ity and part­ner in kind staff cost contributions.

The pro­jects them­selves will include a mix­ture of giv­ing grant sup­port, deliv­ery of ser­vices, con­struc­tion of build­ings and civil engin­eer­ing and know­ledge exchange.

We under­stand that CNPA will be the main applic­ant for the above (and oth­er smal­ler value) fund­ing, how­ever these pro­jects will be under­taken with a range of partners/​contractors. Part­ners may provide deliv­ery sup­port, Match Fund­ing, staff time and/​or let­ters of support.

Pro­jects include work­ing with six pilot farms to demon­strate how a trans­ition to net zero (or even car­bon neg­at­ive) farm­ing can be delivered prac­tic­ally and prof­it­ably in the Cairngorms, and redu­cing per­son­al car use by vis­it­ors and res­id­ents through an access­ible net­work of e‑bikes and asso­ci­ated infra­struc­ture. Enga­ging and inspir­ing people to use e‑bikes and oth­er forms of bicycle as a reg­u­lar mode of trans­port. Sub­con­tract­ing can be provided, for example the Glen Fend­er and Dal­nami­en wood­land schemes have been co-designed between Atholl Estate, TreeStory Ltd forestry con­sult­ants, and Scot­tish Forestry, with addi­tion­al tech­nic­al input to scheme design from the Cairngorms Nation­al Park Authority.

The scheme imple­ment­a­tion, includ­ing fen­cing, ground pre­par­a­tion, plant­ing and after­care will be under­taken by TreeStory Ltd forestry con­sult­ants and their nom­in­ated sub-con­tract­ors with, where appro­pri­ate, help from Atholl Estates staff.

The staff for deliv­ery of the pro­jects will be employed by CNPA, Alzheimer Scot­land and Sus­trans Scot­land. Addi­tion­al staff will be provided by CNPA as an in-kind con­tri­bu­tion. How­ever where con­struc­tion ser­vices are required to under­take a pro­ject., CNPA does not have the staff with rel­ev­ant skills to under­take this work. As a res­ult, CNPA will be con­tract­ing with third parties to provide the rel­ev­ant ser­vices. The VAT on these ser­vices will not be recov­er­able where they relate to ​‘pub­lic good’ projects.

For pro­jects involving lar­ger scale con­struc­tion activ­ity – mainly the Act­ive Com­munit­ies work (Pro­ject 18) it is envis­aged that CNPA will del­eg­ate respons­ib­il­ity for deliv­ery of these pro­ject ele­ments to the rel­ev­ant loc­al author­ity. These organ­isa­tions have staff with the required skills and exper­i­ence and are also the stat­utory trans­port author­it­ies. CNPA plan to grant fund the loc­al author­ity to deliv­er these pro­ject ele­ments, under terms of part­ner­ship and grant agree­ments as this type of con­struc­tion work is out­side CNPA’s cur­rent exper­i­ence. How­ever, we under­stand that CNPA is also con­sid­er­ing spe­cif­ic pro­cure­ment sup­port through the Scot­tish Government’s pro­cure­ment shared ser­vices team.

Receipt of Grants

For VAT pur­poses, the receipt of a grant is out­side the scope of VAT, there­fore no out­put VAT is accoun­ted for on receiv­ing the funds. How­ever, fund­ing agree­ments can and do often state that they are a grant but, in real­ity, are actu­ally a ser­vice level agreement/​contract for ser­vices with con­di­tions on pro­ject deliv­ery. Determ­in­ing wheth­er an agree­ment is a grant or con­tract requires care­ful review of the fund­ing agree­ments and terms.

Appendix 1 below, is taken from HMRC’s intern­al guid­ance. It is broken down in to the fol­low­ing three parts:

1. Factors indic­at­ing the pay­ment is a grant
2. Factors indic­at­ing the pay­ment is con­sid­er­a­tion for a sup­ply (con­tract)
3. Factors that are neutral

These indic­at­ors are what we and HMRC refer to when review­ing fund­ing agree­ments in order to determ­ine the cor­rect VAT liab­il­ity. While there are a list of indic­at­ors in each of the three parts, it is not the case that meet­ing the major­ity of the indic­at­ors in either part res­ults in the agree­ment being a grant or con­tract. You need to review each of the indic­at­ors against the agree­ment to determ­ine the VAT liab­il­ity, how­ever, on occa­sion, we may not be able to cat­egor­ic­ally con­firm the VAT liab­il­ity of the agree­ment and a rul­ing from HMRC may be required in those instances.

Cairngorms 2030: people and nature thriv­ing together.

As noted pre­vi­ously, we were provided with a copy of the Devel­op­ment Grant Noti­fic­a­tion Let­ter issued to CNPA from the Nation­al Lot­tery Her­it­age Fund (“NLHF”). The let­ter states that upon assess­ing CNPA’s applic­a­tion for fund­ing, NLHF has con­firmed that it will offer a Devel­op­ment Grant of up to £1,715,000 towards the Devel­op­ment Phase of the People and Nature Thriv­ing Togeth­er pro­ject (the title giv­en to the Devel­op­ment phase of the Programme).

Hav­ing reviewed the noti­fic­a­tion let­ter, it is our opin­ion that the fund­ing received from NLHF is a grant, and there­fore should be record­ing by CNPA as out­side the scope of VAT.

When review­ing the agree­ment, we referred to the most rel­ev­ant indic­at­ors in Appendix 1. Please see these below with our com­ments in red:

Grant Indic­at­ors

• the pay­ment was made fol­low­ing a grant applic­a­tion pro­cess run by an organ­isa­tion that reg­u­larly provides out­side the scope grants, such as cent­ral or loc­al gov­ern­ment – CNPA (and not NLHF as the fun­der) ini­ti­ated the agree­ment as it sub­mit­ted an applic­a­tion to NLHF for the fund­ing. NLHF is an organ­isa­tion that reg­u­larly provides out­side the scope grants so CNPA meets this condition
• are the fun­ders the bene­fi­ciar­ies of the pro­ject? To be out­side the scope of VAT a grant should be freely giv­en. In using the pay­ment, the sup­pli­er car­ries out its own char­it­able aims and object­ives with the assist­ance of the money which is giv­en with no expect­a­tion of dir­ect bene­fit in return. – there is no men­tion of NLHF receiv­ing any goods or ser­vices from CNPA in return for the pay­ment so this con­di­tion is met.
• the fun­der will not attempt to con­trol how the money is spent bey­ond see­ing that the funds are prop­erly man­aged. Any mon­it­or­ing is no more than simply ensur­ing the pay­ments are appro­pri­ately spent – NLHF do not appear to con­trol how the money is spent oth­er than for the pur­poses noted in CNPA’s applic­a­tion. This con­di­tion is met.
• the sup­pli­er will set its own tar­gets as opposed to the fun­der impos­ing spe­cif­ic tar­gets – CNPA has set its own targets/​milestones as per the applic­a­tion. These were not set by NLHF. This con­di­tion is met.

Sup­ply (Con­tract) Indicators

• who ini­ti­ates the agree­ment? If the fun­der is seek­ing ser­vices in return for their pay­ment then this indic­ates the pay­ment is con­sid­er­a­tion for sup­plies made to them if the fun­der is the dir­ect bene­fi­ciary of the sup­plies. The fun­der believes they are receiv­ing some­thing in return for the pay­ment. – as noted above CNPA ini­ti­ated the agree­ment as it approached NLHF for the funding.
• the con­tract is com­mer­cial in nature i.e. it is a leg­ally bind­ing con­tract con­nec­ted to a busi­ness activ­ity. This means look­ing for indic­at­ors such as pen­alty clauses being in place if the sup­pli­er does not ful­fil their respons­ib­il­it­ies and so is in breach of con­tract – there do not appear to be any pen­alty clauses in the fund­ing agreement.
• each activ­ity car­ried out by the fun­der gives rise to a spe­cif­ic and iden­ti­fi­able pay­ment. This is an agreed sum, either a single pay­ment or a sum per activ­ity i.e. the more work done, the great­er the pay­ment. For this to hap­pen there is prob­ably a detailed record­ing sys­tem for time­keep­ing, out­puts achieved etc. – there are no specific/​identifiable pay­ments linked to activ­ity. The fund­ing is provided as a res­ult of the applic­a­tion made by CNPA and will not increase if CNPA does more than it stated in its applic­a­tion or decrease if the pro­ject is delivered more quickly.

As noted above, as a res­ult of the above ​‘Grant’ indic­at­ors being in place, and the above ​‘Sup­ply’ indic­at­ors not being in place, it is our belief that this fund­ing is out­side the scope of VAT.

VAT Recov­ery

VAT oper­ates on the basis of indi­vidu­al steps in a trans­ac­tion or activ­ity. At this stage, CNPA is not registered for VAT (this point is com­men­ted on in more detail below). It can­not recov­er VAT on costs and the grant fund­ing applic­a­tion has treated all VAT on costs as irrecoverable.

The grant received from NLHF is a sub­sidy to costs; it is not pay­ment for a sup­ply of goods or ser­vices. How­ever, CNPA, in deliv­er­ing their pro­jects might then use those funds to gen­er­ate addi­tion­al income or to make sup­plies to third parties. If this total income exceeded the VAT regis­tra­tion threshold (cur­rently £85k) in a rolling 12 month peri­od CNPA would be required to register for VAT and it might be able to recov­er any VAT incurred in rela­tion to the NLHF agree­ment if the fund­ing was spent in con­nec­tion with the mak­ing of oth­er tax­able sup­plies by CNPA. Tax­able sup­plies can take many forms, how­ever in the case of CNPA, this could be a con­tract for the hir­ing of equip­ment to third parties, sup­ply of con­sultancy ser­vices to third parties, provid­ing con­struc­tion ser­vices to a third party, or for selling of tick­ets to an event for a con­sid­er­a­tion. Con­sid­er­a­tion can be either money or goods and ser­vices as a barter. If this were the case, then CNPA would be entitled to recov­er all of the VAT incurred on costs in rela­tion to tax­able (VAT­able) activ­it­ies even if that expendit­ure was fun­ded dir­ectly from the NLHF fund.

If CNPA were VAT registered and the fund­ing is used to deliv­er both tax­able and exempt/­free-of-charge (non-busi­ness) activ­it­ies, CNPA would be entitled to recov­er a pro­por­tion of the VAT incurred on costs. This would be determ­ined by using a busi­ness/non-busi­ness and or par­tial exemp­tion calculation.

If the fund­ing is used wholly in rela­tion to free-of-charge (non-busi­ness) activ­it­ies, CNPA would not be entitled to recov­er any VAT incurred in rela­tion to this agree­ment. Fur­ther inform­a­tion on VAT recov­ery and the prin­ciples of determ­in­ing VAT recov­ery can be found in the ​‘VAT Recov­ery’ sec­tion below.

Oth­er Agreements

As the pro­jects move for­ward and CNPA enters into more fund­ing and deliv­ery agree­ments, each of the agree­ments needs to be reviewed and the VAT liab­il­ity confirmed.

It was dis­cussed with Louise Allen, that a check­list of poten­tial risks be draf­ted and used to review all of the forth­com­ing agree­ments for VAT pur­poses. Also, the check­list could be used to review the VAT pos­i­tion of an exist­ing agree­ment or struc­ture where it is mater­i­ally changed. This will ensure that poten­tial VAT risks are iden­ti­fied and mit­ig­ated where possible.

We would be happy to review these agree­ments as and when either CNPA Is draft­ing them to ensure that they are worded appro­pri­ately if there is no inten­tion to make a sup­ply of goods or ser­vices, or that any genu­ine sup­plies of goods or ser­vices are iden­ti­fied at the earli­est opportunity.

Con­tracts for Services

As noted above, each agree­ment CNPA enters into to deliv­er the Cairngorms 2030 pro­gramme needs to be reviewed and the VAT pos­i­tion determ­ined. These are sep­ar­ate from the ini­tial grant fund­ing agree­ment from NLHF and relate to how that grant fund­ing is used.

If a deliv­ery agree­ment is not a grant, we need to con­sider the VAT liab­il­ity of the income received. Again, Appendix 1 details indic­at­ors which can help identi­fy when an agree­ment is a con­tract for services.

If an agree­ment is a con­tract for ser­vices, the income received could be liable to zero-rate (0%), reduced-rate (5%) or stand­ard-rate (20%) VAT, or exempt from VAT.

At this stage, we have not reviewed any agree­ments oth­er than the NLHF fund­ing, how­ever CNPA pro­spect­ively may be engaged in the pro­vi­sion of con­struc­tion ser­vices, con­sultancy, sup­ply of staff or man­age­ment of a grant fund etc. to third parties. All of these ser­vices would be liable to VAT if they are car­ried out for a con­sid­er­a­tion i.e. fur­ther income or under a barter agreement.

As CNPA is not cur­rently registered for VAT, should it be engaged in any tax­able sup­plies, it may res­ult in it being required to register for VAT (see ​‘VAT Regis­tra­tion’ sec­tion below).

By review­ing these agree­ments, we will be able to determ­ine if any are liable to VAT and the poten­tial impact this may have on CNPA.

Sup­plies to Partnerships

As noted below, CNPA has stated in it’s Pro­gramme doc­u­ments that it will be involved in col­lab­or­at­ive agree­ments. These could res­ult in a deemed part­ner­ship being cre­ated for VAT pur­poses were CNPA to sup­ply any goods or ser­vices such as, but not exclus­ively, staff, hire of goods, con­sultancy to a part­ner­ship where it is a part­ner, for a con­sid­er­a­tion or a share of any part­ner­ship profit. This would be a sup­ply from one leg­al entity (CNPA) to anoth­er (the part­ner­ship) i.e. the part­ner is a sep­ar­ate entity from the part­ner­ship and it is likely that the goods or ser­vices sup­plied would be tax­able for VAT pur­poses. If CNPA is not VAT registered at the time of the sup­ply, this would count towards CNPA’s VAT regis­tra­tion threshold. If CNPA is registered for VAT at the time of sup­ply, CNPA would likely have to account for 20% out­put VAT on the supply.

This would apply to the sup­ply of staff or recharges for shared services.

Use of Grants/​Funding

While the receipt of fund­ing by CNPA for the Cairngorms 2030 Pro­gramme may be a grant and out­side the scope of VAT, there are oth­er VAT issues to con­sider in how CNPA uses the funding.

The sec­tions below provide more detail on vari­ous points which may be applic­able to CNPA mov­ing for­ward with this programme.

Con­tracts With Oth­er­s/Sub-Con­tracts

If CNPA were to use the fund­ing to engage a third party to provide ser­vices to CNPA, it is likely that the third party will be required to charge VAT on their sup­ply to CNPA. This would appear to apply to the fol­low­ing projects:

• Wood­land Expan­sion – if CNPA is required to carry out the plant­ing of the trees, we under­stand that this would not be under­taken by CNPA as it does not have staff with the cap­ab­il­it­ies to under­take this work
• Peat­land Res­tor­a­tion – if CNPA is required to provide tech­nic­al experts/​consultants and it does not have the expert­ise to do this itself, we believe this would be have to be out-sourced.
• Cairngorms Future Farm­ing – if CNPA is unable to provide/​undertake car­bon audits, integ­rated land man­age­ment plans and hab­it­at sur­veys, these would need to be under­taken by a third party.
• Effect­ive Com­munity Engage­ment – if CNPA does not have the skills and resources to devel­op the ​‘toolkit’, we pre­sume this would be out-sourced.
• Act­ive Com­munit­ies – if CNPA is required to carry out improve­ments to travel infra­struc­ture, we under­stand that this would not be under­taken by CNPA as it does not have staff with the cap­ab­il­it­ies to under­take this work

The pro­vi­sion of con­struc­tion or con­sultancy ser­vices by the sub­con­tract­ors should be liable to stand­ard-rate (20%) VAT. At this stage, as CNPA’s VAT regis­tra­tion pos­i­tion has not been con­firmed, we agree that the CNPA budget for VAT being an irre­cov­er­able cost is cor­rect. Even if CNPA were VAT registered, VAT on cer­tain pro­jects with­in the Pro­gramme may not entitle CNPA to VAT recov­ery in full for costs asso­ci­ated with the pro­ject. The ​‘VAT Recov­ery’ sec­tion below has more details on this.

Staff

We under­stand that the staff for deliv­ery of the pro­jects will be employed by CNPA, Alzheimer Scot­land and Sus­trans Scot­land with addi­tion­al staff provided by CNPA as an in-kind contribution.

For VAT pur­poses, the sup­ply of staff is a tax­able sup­ply for VAT pur­poses. Where anoth­er organ­isa­tion sup­plies staff to CNPA for a con­sid­er­a­tion, stand­ard-rate (20%) VAT would be charged by that organ­isa­tion to CNPA (if that organ­isa­tion is registered for VAT) and would be a tax­able sup­ply by CNPA if it sup­plies staff to oth­er organ­isa­tions for a con­sid­er­a­tion. If CNPA does not receive any con­sid­er­a­tion for the staff time and funds the staff cost out of the NLHF grant then no VAT is due.

Man­aging a Grant Fund

While review­ing the Cairngorms 2030 Pro­gramme, we found no men­tion of CNPA man­aging any grant funds on behalf of fund­ing pro­viders and as such this does not cre­ate an obvi­ous tax­able supply.

For future ref­er­ence, if CNPA were to hold any grant funds in escrow (e.g. held a sep­ar­ate bank account or are des­ig­nated so that the funds must be awar­ded to third parties and CPNA is not entitled to spend the funds on its own activ­it­ies) and were to man­age­ment of the dis­tri­bu­tion of those grant funds on behalf of anoth­er organ­isa­tion, could cre­ate a tax­able sup­ply and the agree­ment would need to be reviewed to con­firm its VAT liability.

Partnerships/​Collaborative Working

We under­stand that at this stage, CNPA does not intend for any profit to arise from any col­lab­or­a­tion agree­ments. If this is the case, then any col­lab­or­at­ive agree­ments would not be deemed (for VAT pur­poses) as the cre­ation of a new part­ner­ship entity (see below). How­ever, we have seen with oth­er cli­ents in sim­il­ar cir­cum­stances, that inten­tions can shift and the poten­tial to gen­er­ate addi­tion­al income in the form of profits from these types of agree­ments may be ques­tioned or dis­cussed. The notes below detail the con­di­tions when a part­ner­ship can be deemed to be cre­ated for VAT pur­poses and will allow CNPA to identi­fy when this risk can arise.

For VAT pur­poses, col­lab­or­at­ive work­ing can pose a risk to CNPA as the part­ner­ship may be deemed an entity in its own right and poten­tially require VAT regis­tra­tion. Without a form­al part­ner­ship agree­ment this would not cre­ate a form­al leg­al entity but simply a sim­pli­fic­a­tion for VAT only.

For VAT pur­poses, the agree­ment may res­ult in one of the following:

Joint Ven­tures

The terms joint ven­ture and con­sor­ti­um have no leg­al sig­ni­fic­ance for VAT pur­poses. They merely denote a situ­ation where two or more per­sons come togeth­er for one or more spe­cified busi­ness ven­tures or transactions.

When two or more per­sons join togeth­er in a busi­ness enter­prise or ven­ture, their activ­it­ies may give rise to the cre­ation of a new entity and VAT regis­tra­tion, or they may not (see ​‘JANE’ sec­tion below)

HMRC’s intern­al guid­ance note VATREG08300 — Entity to be registered: part­ner­ships: defin­i­tion states:

‘A part­ner­ship is defined in the Part­ner­ship Act 1890, sec­tion 1(1) as ​‘the rela­tion which sub­sists between per­sons car­ry­ing on a busi­ness in com­mon with a view to profit’. For the pur­poses of the Part­ner­ship Act 1890, per­sons act­ing in part­ner­ship are col­lect­ively called ​‘a firm’. The terms ​‘part­ner­ship’ and ​‘firm’ are, to all intents and pur­poses, interchangeable.

Basic­ally put, a part­ner­ship is an unin­cor­por­ated asso­ci­ation (although indi­vidu­al part­ners may be cor­por­ate bod­ies) in which the agree­ment between the parties is such that the relationship

• between them­selves, and
• between them­selves and third parties

is gov­erned by the Part­ner­ship Act.

It is the sum of the mem­bers that is the ​‘per­son’.’

At the same time, HMRC (for VAT pur­poses) can deem a part­ner­ship to exist even where no form­al part­ner­ship agree­ment is in place (a ​‘deemed part­ner­ship’). This ​‘deemed part­ner­ship’ can be required to register for VAT inde­pend­ently of its partners/​participants where it makes tax­able sup­plies in excess of the VAT regis­tra­tion threshold.

HMRC’s intern­al guid­ance note VATREG08450 — Entity to be registered: part­ner­ships: evid­ence of part­ner­ship states:

‘The busi­ness must be car­ried on by two or more per­sons in com­mon with a ​‘view to a profit’

In oth­er words, there must be a single busi­ness, even if that busi­ness is car­ried on in a num­ber of sep­ar­ate divi­sions. If, on a true ana­lys­is, each sup­posed part­ner is car­ry­ing on a sep­ar­ate busi­ness, there can in law be no part­ner­ship between them.

A part­ner­ship is the rela­tion­ship res­ult­ing from a con­tract, either express or implied. In determ­in­ing the exist­ence of a part­ner­ship, regard must be paid to the true con­tract or inten­tion of the parties as appear­ing from all the cir­cum­stances of the case. The ​‘true con­tract and inten­tion’ is often a mat­ter of fact.

A form­al, writ­ten agree­ment is not neces­sary for the form­a­tion of a part­ner­ship and you will come across many part­ner­ships, which are based on oral or ​‘gentlemen’s’ agree­ments. On the oth­er hand, the exist­ence of a form­al, writ­ten agree­ment is not, of itself, con­clus­ive evid­ence that the rela­tion­ship between two or more parties con­sti­tutes a partnership.

Those parties must share any net profits and losses arising from the busi­ness activities

If the terms of any agree­ment are such that it is tech­nic­ally pos­sible for one party to the agree­ment to make a profit and anoth­er to make a loss (wheth­er in the long or the short term), the rela­tion­ship between those parties is not one of part­ner­ship. How­ever, the divi­sion of profits does not have to be equal. It is pos­sible for one part­ner to have a great­er fin­an­cial interest in the part­ner­ship than anoth­er and con­sequently they may receive a lar­ger pro­por­tion of the profits.

Care should there­fore be taken with any agree­ments CNPA enter into as they may give rise to a part­ner­ship wheth­er that was the inten­tion or not.

VAT Regis­tra­tion

CNPA VAT Registration

In our VAT health check report from April 2021, we high­lighted that there was a risk that CNPA may have his­tor­ic­ally breached the VAT regis­tra­tion threshold (cur­rently £85,000). We under­stand fur­ther ana­lys­is and review of CNPA’s income at that time was not under­taken and this his­tor­ic point has not been determined.

As noted above, it is believed that all of the agree­ments CNPA enters into will be grants inten­ded to sub­sid­ise costs (and out­side the scope of VAT), how­ever this may change mov­ing for­ward and there is a pos­sib­il­ity that some of the income CNPA will derive as part of the Cairngorms 2030 Pro­gramme with the exclu­sion of the NLHP funds may be liable to VAT. If it were, this tax­able income would count towards its tax­able income for the pur­poses of VAT regis­tra­tion. The income from any one of these agree­ments on their own, or a com­bin­a­tion of mul­tiple agree­ments and his­tor­ic income may push CNPA over the threshold for VAT registration.

An entity mak­ing no tax­able sup­plies and car­ry­ing out pro­jects solely sup­por­ted by grant fund­ing or dona­tions, would not be eli­gible to register for VAT and there­fore is not able to recov­er any VAT.

An entity mak­ing tax­able sup­plies must noti­fy HMRC if at the end of any month the value of tax­able sup­plies in the last 12 months (or less) has exceeded the VAT regis­tra­tion threshold (cur­rently £85,000). The require­ment to register for VAT must be noti­fied to HMRC with­in 30 days of the end of the month that this occurred. HMRC must also be noti­fied of an entity’s require­ment to register for VAT if it is expec­ted that tax­able sup­plies in the next 30-day peri­od alone will exceed the VAT regis­tra­tion threshold.

If you require, we can review the Cairngorm’s 2030 Pro­gramme agree­ments. We will con­sider the VAT regis­tra­tion pos­i­tion of CNPA in light of the VAT liab­il­ity of each agree­ment and com­mu­nic­ate this with CNPA. Should VAT regis­tra­tion be required, we can assist CNPA with all aspects of noti­fy­ing HMRC of this requirement.

If CNPA were to become VAT registered, it would be entitled to recov­er some (but likely not all) of the VAT it incurs. The ​‘VAT Regis­tra­tion’ sec­tion below provides fur­ther inform­a­tion on this.

Part­ner­ship Registrations

As noted above, the agree­ments entered into under the Cairngorm’s 2030 Pro­gramme, may cre­ate deemed part­ner­ships between CNPA and the oth­er organ­isa­tions for VAT pur­poses if there is any inten­tion to gen­er­ate a profit. If a new deemed part­ner­ship is cre­ated, its VAT regis­tra­tion pos­i­tion also needs to be reviewed and determ­ined in its own right. This would be sep­ar­ate from CNPA’s own VAT regis­tra­tion position.

VAT Recov­ery

CNPA

VAT incurred on expendit­ure (by a VAT registered busi­ness or char­ity) is recov­er­able as follows:

• VAT wholly attrib­ut­able to tax­able activ­it­ies is recov­er­able in full.
• VAT wholly attrib­ut­able to exempt or non-busi­ness activ­it­ies is blocked from recov­ery (sub­ject to de-min­imis limits).
• VAT on expendit­ure that is attrib­ut­able to a mix­ture of activ­it­ies is recov­er­able in part.

Where an organ­isa­tion receives a mix­ture of tax­able, exempt and/​or non-busi­ness income it will be required to per­form a non-busi­ness appor­tion­ment and/​or a par­tial exemp­tion cal­cu­la­tion to con­firm the value of recov­er­able VAT.

There is no pre­scribed meth­od for per­form­ing a busi­ness/non-busi­ness cal­cu­la­tion. Com­mon meth­ods of appor­tion­ment are based on:

• Income
• Expendit­ure
• Floor area
• Staff head­count

Turn­ing to the par­tial exemp­tion cal­cu­la­tion, the stand­ard meth­od (which is based on income) can be used to cal­cu­late the value recov­er­able VAT without HMRC’s approv­al. How­ever, with HMRC’s approv­al a ​‘spe­cial’ meth­od can be used where it can be demon­strated that the stand­ard meth­od would not provide an accur­ate reflec­tion of the use of the expenditure.

Spe­cial par­tial exemp­tion cal­cu­la­tions are often based on the following:

• Expendit­ure
• Floor area
• Staff head count
• Trans­ac­tions

This is explained in great­er detail at Appendix 1.

At this stage, we have not reviewed the indi­vidu­al Cairngorm 2030 Pro­gramme pro­ject agree­ments and so we can­not con­firm wheth­er or not CNPA will have a require­ment to register for VAT or if it has a his­tor­ic require­ment to register as pre­vi­ously highlighted.

Ulti­mately, in order for CNPA to be able to recov­er any VAT incurred on the Cairngorms 2030 Pro­gramme, it would have to be under­tak­ing tax­able activ­it­ies and be registered for VAT. It may be that some pro­jects might include tax­able activ­ity, and some might not. In which case CNPA would be entitled to full VAT recov­ery on costs which dir­ectly relate to pro­jects which are fully tax­able. Where a pro­ject is not tax­able, there would be no VAT recov­ery on any dir­ect costs. For costs which are not dir­ectly attrib­ut­able to a spe­cif­ic pro­ject, CNPA may be entitled to recov­er an ele­ment of the VAT incurred on costs (e.g., over­head costs) if it is VAT registered. This is what a busi­ness/non-busi­ness and par­tial exemp­tion cal­cu­la­tion is there to determine.

We would assist CNPA in determ­in­ing the best cal­cu­la­tion that could be under­taken by CNPA in order to max­im­ise its VAT recovery.

His­tor­ic Registration

If CNPA has a his­tor­ic require­ment, HMRC can issue a pen­alty for a fail­ure to noti­fy them of the VAT regis­tra­tion require­ment. Any pen­alty is based on beha­viours and broken down as follows:

Type of beha­viour	Unpromp­ted or promp­ted dis­clos­ure	Pen­alty range
Non-delib­er­ate	Promp­ted — with­in 12 months of tax being due	0% to 30%
Non-delib­er­ate	Unpromp­ted — 12 months or more after tax was due	10% to 30%
Non-delib­er­ate	Promp­ted — with­in 12 months of tax being due	10% to 30%
Non-delib­er­ate	Unpromp­ted — 12 months or more after tax was due	20% to 30%
Delib­er­ate	Unpromp­ted	20% to 70%
Delib­er­ate	Promp­ted	35% to 70%
Delib­er­ate and concealed	Unpromp­ted	30% to 100%
Delib­er­ate and concealed	Promp­ted	50% to 100%

If you tell HMRC about a fail­ure to noti­fy before you had any reas­on to believe that HMRC were about to find it, this an ​‘unpromp­ted dis­clos­ure’. If you tell HMRC about a fail­ure at any oth­er time, it is a ​‘promp­ted disclosure’.

How­ever, HMRC guid­ance does state they will not charge a pen­alty for a fail­ure to noti­fy if all of the fol­low­ing apply:

• you have a reas­on­able excuse for the failure
• the fail­ure was not deliberate
• you told us without unreas­on­able delay after your reas­on­able excuse ended

Due to the poten­tial of pen­al­ties which are based on time and wheth­er HMRC identi­fy a late regis­tra­tion, we would recom­mend that the his­tor­ic VAT regis­tra­tion pos­i­tion of CNPA be reviewed and confirmed.

Part­ner­ships

The VAT recov­ery pos­i­tion for any poten­tial part­ner­ships (actu­al or deemed) is based on the same prin­ciples as noted above under ​‘CNPA’.

Appendix 1 – Grants vs SLA Indicators

HMRC guid­ance on factors indic­at­ing the pay­ment is a grant

The fol­low­ing factors are taken from pre­ced­ent cases. They are not in any par­tic­u­lar order, all factors should be con­sidered when mak­ing a decision. The more there are in your situ­ation, the more likely it is that the pay­ment is out­side the scope of VAT.

The factors to con­sider are:

• the pay­ment was made fol­low­ing a grant applic­a­tion pro­cess run by an organ­isa­tion that reg­u­larly provides out­side the scope grants, such as cent­ral or loc­al government
• are the fun­ders the bene­fi­ciar­ies of the pro­ject? To be out­side the scope of VAT a grant should be freely giv­en. In using the pay­ment, the sup­pli­er car­ries out its own char­it­able aims and object­ives with the assist­ance of the money which is giv­en with no expect­a­tion of dir­ect bene­fit in return
• the fun­der will not attempt to con­trol how the money is spent bey­ond see­ing that the funds are prop­erly man­aged. Any mon­it­or­ing is no more than simply ensur­ing the pay­ments are appro­pri­ately spent
• the sup­pli­er will set its own tar­gets as opposed to the fun­der impos­ing spe­cif­ic targets
• the pay­ments are not treated as trad­ing income or expendit­ure in the accounts of either party
• if the fund­ing is with­drawn there is no leg­al redress for the sup­pli­er to have the pay­ment reinstated
• fund­ing is drawn down by the sup­pli­er as a reim­burse­ment of expendit­ure incurred, rather than an advance pay­ment for ser­vices. Altern­at­ively, there may be a ​‘defi­cit fund­ing’ arrange­ment whereby the fun­der agrees to plug any fund­ing gaps
• the fund­ing is provided under a stat­utory pro­vi­sion that empowers the fun­der to make a grant. This would be mainly rel­ev­ant if the fun­der is a Gov­ern­ment depart­ment or loc­al authority
• there is a ​‘claw­back’ pro­vi­sion with­in the agree­ment. Fun­ders use this meth­od to reclaim their fund­ing in cir­cum­stances such as where not all the money was spent or if the terms of the agree­ment were not com­plied with. In con­trast, a con­tract for a sup­ply should not con­tain a ​‘claw­back’ clause as there is no auto­mat­ic right to reclaim any money. The money is con­sid­er­a­tion for the sup­ply and the solu­tion for reclaim­ing the pay­ment in any sub­sequent breach of con­tract is to sue for damages.

HMRC guid­ance on factors indic­at­ing the pay­ment is con­sid­er­a­tion for a supply

The fol­low­ing factors are taken from pre­ced­ent cases. They are not presen­ted in any par­tic­u­lar order, all factors should be con­sidered when mak­ing a decision. The more there are in your situ­ation, the more likely it is that the pay­ment is con­sid­er­a­tion for a supply.

The factors to con­sider are:

• who ini­ti­ates the agree­ment? If the fun­der is seek­ing ser­vices in return for their pay­ment then this indic­ates the pay­ment is con­sid­er­a­tion for sup­plies made to them if the fun­der is the dir­ect bene­fi­ciary of the sup­plies. The fun­der believes they are receiv­ing some­thing in return for the payment.
• the sup­pli­er under­takes out­sourced activ­it­ies on behalf of the fun­der where the ser­vices provided are ones ordin­ar­ily provided by the fun­der so the sup­pli­er is act­ing as a sub­con­tract­or. Examples include the pro­vi­sion of func­tions ordin­ar­ily under­taken by loc­al author­it­ies that they have a stat­utory duty to per­form and would face sanc­tions if they did not happen.
• the con­tract is com­mer­cial in nature i.e. it is a leg­ally bind­ing con­tract con­nec­ted to a busi­ness activ­ity. This means look­ing for indic­at­ors such as pen­alty clauses being in place if the sup­pli­er does not ful­fil their respons­ib­il­it­ies and so is in breach of contract.
• the sup­plies are under­taken as an eco­nom­ic activ­ity. It is not neces­sary for the sup­pli­er to have a profit motive, but the type of sup­plies should have the poten­tial to make a profit.
• the rela­tion­ship between the fun­der and sup­pli­er will be at ​‘arms length’ and there will be an absence of con­trol from the fun­der in the supplier’s decision mak­ing process.
• the pay­ments made by the fun­der to the sup­pli­er are made spe­cific­ally for the sup­pli­er to provide par­tic­u­lar ser­vices to its cli­ents. The fact that the fun­der does not know at the time the ser­vice is provided the iden­tity of the cli­ent or the even the spe­cif­ic ser­vice which is being provided is not relevant.
• each activ­ity car­ried out by the fun­der gives rise to a spe­cif­ic and iden­ti­fi­able pay­ment. This is an agreed sum, either a single pay­ment or a sum per activ­ity i.e. the more work done, the great­er the pay­ment. For this to hap­pen there is prob­ably a detailed record­ing sys­tem for time­keep­ing, out­puts achieved etc.
• the fun­der will attempt to con­trol how the money is spent, maybe impos­ing spe­cif­ic tar­gets in terms of quant­ity, qual­ity, time­frames etc. Any mon­it­or­ing is more than simply ensur­ing the pay­ments are spent prop­erly and is to ensure that spe­cif­ic sup­plies are made.
• if the fund­ing is with­drawn there is leg­al redress for the sup­pli­er to have the pay­ment rein­stated or claim compensation
• the pay­ments are treated as trad­ing income or expendit­ure in the accounts of either party.

HMRC guid­ance on factors that are neutral

The fol­low­ing factors are taken from pre­ced­ent cases. The court decisions refer­ring to these factors regarded them as neut­ral, so their pres­ence in an agree­ment gen­er­ally does not indic­ate either way wheth­er the pay­ment is an out­side the scope grant or consideration.

The neut­ral factors are:

• the pay­ment is described as a grant in the con­tract and cor­res­pond­ence. Whilst the word­ing of a con­tract is import­ant, what the pay­ment is called does not determ­ine its VAT treatment.
• the level of detail with­in the contract/​agreement does not point in either dir­ec­tion, i