01 May 2022
In addition to the cost-of-living crisis, there is also a cost-of-dying crisis as funeral costs increase due to factors such as a lack of space for burials and increasing energy costs for cremations. As a result, recent reports highlight families are turning to renting coffins and Scotland could soon approve 'water cremations'. Part of the problem is that the lack of land can result in burial plots being located in areas with unstable soil or issues with water ingress, as highlighted in the recent case of Ayr Cemetery where bodies will need to be exhumed to resolve the issue, ultimately leading to extra burial costs. A recent VAT case may however help to ease the financial burden of bereaved families.
The tax tribunal has recently considered the VAT exemption for services related to burial and cremation in a case where a building contractor was engaged to install flexible ‘pre-formed burial vaults’ at a burial site in east London. This type of vault is used in graveyards with unstable soil structures, both to prevent the escape of toxins from the decomposition of bodies escaping into the ground water and the subsidence of an existing grave where a new one is dug close by. Such vaults appear to be increasingly necessary and can be costly, so the VAT implications are important.
The contractor took the view that its work was ‘the making of arrangements in connection with the disposal of the remains of the dead’, which is exempt from VAT. HMRC disagreed, taking the view that the installation work was subject to VAT. HMRC believed that the exemption was limited to supplies that are directly involved with the disposal of the remains of a particular dead person, so was confined to supplies made by the funeral director appointed to deal with the deceased. In HMRC’s opinion, the exemption did not extend to subcontractors.
The contractor appealed. When installing the vaults, it pointed out that it had effectively dug a number of graves in advance, the sole purpose of which was to dispose of the remains of the dead, and argued that it did not matter that the undertaker did not prepare the grave itself.
The tribunal has ruled in favour of the contractor, deeming that the supplies were exempt.
In reaching its decision, the tribunal observed that the digging of graves is pivotal to the disposal of remains of the dead. Although that service is normally provided by an undertaker or the operator of a cemetery, the tribunal could see no reason why the digging of a grave by another person should not also be exempt from VAT. Nor did it matter that the graves were prepared in advance and not provided in connection with a specific funeral. The tribunal also noted that the use of new technology, in this case using a pre-formed vault, had the same purpose as older methods described in HMRC’s guidance, for example installing brick linings in each grave. It found that the VAT exemption must be interpreted in a way that enables new technology to be adopted to achieve the overall aim – in this case, both methods provided graves for disposal of the dead in unstable soil areas.
Although the wording in HMRC’s VAT notice seems to limit the exemption for digging a grave by an undertaker or the operators of a cemetery, the tribunal also delivered a reminder that the text of the notice is just HMRC’s interpretation, which does not have the force of law.
There are various business structures in the funeral industry and therefore a number of ways VAT could affect the supply chain. However, had the contractor not challenged HMRC and simply added VAT to its fee, this could in some situations have led to a ‘cost of dying’ increase to the price of funerals for customers at the end of the supply chain.
This appeal also highlights the occasional tendency of HMRC to get overly hung up on who is delivering a supply, even in situations where the law does not confine a VAT relief to particular organisations. While it’s true that some VAT exemptions are only available to authorised providers, for example in the health and education sectors, many others simply require the nature of the goods or services provided to match the description in the legislation. In this case, there is nothing in the VAT law that limits the exemption on arrangements connected to burials of the dead to funeral directors or cemeteries, but HMRC still behaved as if there was. As ever, it may often pay to check the letter of the law instead of assuming that HMRC’s guidance is always the final word.