Housing association — VAT — Eligibility for zero-rating — Whether association’s activities conducted in course or furtherance of a business — Item 2(a) in Group 5 of Schedule 8 to Value Added Tax Act 1994 — Appeal dismissed
The appellant housing association was a limited company with charitable status and was registered as a social landlord. It owned numerous properties that it let to residential tenants at rents that were below the usual market rent, operating under the extensive regulatory framework applicable to housing associations. Some properties were sold under the right-to-buy scheme or where they had become surplus to requirements. The appellant received various government grants to subsidise rents and to pay for major repairs. Any profits that the appellant made were reinvested in its activities.
The appellant applied to the respondents to certify construction works to a new divisional head office as zero-rated for VAT purposes. It contended that the works fell under item 2(a) in Group 5 of Schedule 8 to the Value Added Tax Act 1994, as a supply in the course of the construction of a building intended for use for a relevant charitable purpose. By note (6) to Group 5, such use was use otherwise than in the course or furtherance of a “business”, as defined in section 94. The respondents refused the zero-rating, and the VAT and Duties Tribunal upheld that decision.
The tribunal held that section 94 had to be construed in the light of the Sixth VAT Directive, particularly article 4(2), from which it was clear that the scope of business or economic activities was wide. It found that charitable purposes and business activities were not mutually exclusive and that business activities pursued for charitable reasons had no special status. It concluded that the appellant was in the business of supplying accommodation at a low cost and, accordingly was not entitled to zero-rating.
On appeal, the appellant submitted that the tribunal had wrongly characterised its activities. It further argued that it qualified as a body “governed by public law”, whose public functions should not be taxable, pursuant to article 4(5) of the directive, and that, although it was not eligible for refund of VAT under section 33 of the 1994 Act, the purpose of article 4(5) could be achieved by recognising that it was not making supplies in the course of a business.
Held: The appeal was dismissed.
(1) The word “business” had a wide meaning, and the fact that an activity was not carried on for profit did not necessarily mean that that activity did not amount to a business or trade. Indicia as to whether an activity was a business included whether it was: (i) pursued with reasonable continuity; (ii) substantial in amount; (iii) conducted regularly upon sound and recognised business principles; (iv) predominantly concerned with the making of taxable supplies to consumers for a consideration; and (v) such as consisted of taxable supplies of a kind commonly made by those who sought to make a profit from them: Customs & Excise Commissioners v Lord Fisher [1981] STC 238 and Customs & Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1 applied.
Although the fact of letting at a rent was not sufficient to render a transaction an economic or business activity, the tribunal had correctly concluded that the appellant’s activities were in the course or furtherance of a business, in circumstances in which its activity was wholly concerned with letting properties to residential occupiers and selling properties, and where its income was principally derived from rents received from tenants. The fact that the appellant did not maximise or distribute its profits, and was subject to an extensive regulatory framework and to upper limits on the rent chargeable, did not affect that conclusion: Commission of the European Communities v Netherlands C-235/85 [1987] ECR 1471 and Yarburgh Children’s Trust v Customs & Excise Commissioners [2002] STC 207 considered.
(2) Article 4(5) did not assist the appellant either directly or by way of analogy, since it provided an exemption only for bodies governed by public law and then only for activities or transactions in which they were engaged as public authorities.
Alison Foster QC (instructed by KPMG LLP, of Manchester) appeared for the appellant; Paul Lasok QC and Ian Hutton (instructed by the legal department of Revenue & Customs, Manchester) appeared for the respondents.
Sally Dobson, barrister