Should potentially competitive business activities engaged in by charities be exempt from VAT? The First-tier Tribunal (FTT) confronted that issue in extending VAT exemption to supplies made by a restaurant where students with learning disabilities gain valuable experience of the hospitality trade.

The charity that ran the venue was funded by a further education college to provide vocational training to disabled students. It sought cancellation of its VAT registration on the basis that it made no taxable supplies. It appealed to the FTT after HM Revenue and Customs (HMRC) rejected that application.

Upholding the charity’s appeal, the FTT noted that the restaurant provided a training environment for students with a view to them acquiring the skills, qualifications and experience required to find meaningful employment in the hospitality industry. According to the charity, it ran at a substantial loss.

The FTT acknowledged that the restaurant caters for ordinary members of the public and is advertised both in newspapers and online. Despite its restricted opening hours, it had the potential to compete with commercial businesses. Paid staff were employed on the premises to supervise students.

The purpose of the restaurant was not, however, to generate additional income for the college. Its operation was closely related – indeed essential – to the provision of training by the charity, which was itself a supply of services exempt from VAT. HMRC’s refusal to cancel the charity’s VAT registration was unreasonable and it was ordered to re-make the decision in the light of the FTT’s ruling.