Charity rendering services by improving school buildings leased to operating charity – Improvements partly funded by “grants” made by operating charity – Neither services nor grants contemplated by lease – Whether services a taxable supply – Whether services “done for consideration” – Whether legal relationship subsisting outside relationship of landlord and tenant – Whether required element of reciprocity present
The respondent charitable foundation owned and operated seven schools. In 1993 a reorganisation took place and a new charitable company (the company) was formed to operate the schools. The foundation, which retained the ownership and management of the school properties, granted a 19-year lease of the schools to the company at a full market rent, with provision for a three-yearly rent review that took the lessor’s improvements into account, however funded. The foundation also waived the VAT exemption otherwise applicable to rents.
On executing the lease, the company wrote to the foundation confirming that it had been resolved that, as and when cash surpluses arose, the company would “grant” those surpluses to the foundation in so far as it could do so consistently with the objects of the company. On the same day, the directors of the foundation recorded that the purpose of the resolution was to minimise the borrowing requirements of the foundation “in its commitment to finance the building programme agreed between the two charities”.
Over the following three years the foundation spent some £25m (inclusive of VAT) on improving the school properties, receiving, over the same period, four grants from the company totalling £4.8m. Relevant minutes of meetings showed a correlation between decisions to carry out works and decisions to provide grants.
In or about 1999 the Customs and Excise Commissioners decided that £148,936 was payable by the foundation as output tax in relation to the first grant. The foundation appealed successfully to the London VAT and Duties Tribunal, which held that the work provided by the foundation could not be described, for the purposes of section 5(2) of the Value Added Tax Act 1994, as a supply of services “done for consideration”. In the view of the tribunal, the relationship (other than the landlord and tenant relationship) between the two charities was in the nature of “optional co-operation” and, as such, fell short of the “legal relationship” required before services could be treated as a taxable supply. The commissioners appealed to the High Court.
Held: The appeal was allowed.
1. In reaching its conclusion, the tribunal had rightly sought to apply Tolsma v Inspecteur der Omzetbelasting Leeuwarden[1994] STC 509, in which the European Court ruled that there had to be: (i) reciprocity or a direct link between the consideration and the service; and (ii) a legal relationship between the parties.
2. As regards the second element, although most cases gave rise to a relationship that English law would treat as contractual, it would, having regard to the European character of the tax, be putting the matter too narrowly to insist on such a relationship in every case: see para 9 of the preamble to the Sixth Directive and the observations of Advocate General Da Cruz Vilasca in Naturally Yours Cosmetics Ltd v Customs & Excise Commissioners[1988] STC 879 at p886. On the other hand, it was wrong to suggest that money paid for services, even if not payable pursuant to a legal obligation, might attract VAT. The court was satisfied that the foundation and the company, both by their initial declarations and by their subsequent conduct, had committed themselves to a relationship of a contractual nature. The fact that disputes could arise as to the circumstances in which an alleged surplus came to be payable did not make their commitments too uncertain to give rise to a legally enforceable obligation under English law.
3. The same factors led to the conclusion that there was a sufficient degree of reciprocal performance in terms of services provided and money paid. It was not material that the foundation had spent much more than it had received by way of grants. In reality, the company was, by making grants, obtaining improvements over and above those that the foundation would have been able or willing to finance.
4. Nor was it material that the foundation would benefit from the improvements, both in terms of increased rent and improved capital value. That did not alter the fact that the company would also benefit. Although the company was, in effect, paying VAT twice over for the improvements, that outlay was also to be left out of account, as it was solely attributable to the election made by the foundation and the agreement reached on the terms of the lease.
Melanie Hall (instructed by the solicitor to HM Customs & Excise) appeared for the appellants; David Milne QC and Richard Vallat (instructed by Nabarro Nathanson) appeared for the respondent.
Alan Cooklin, barrister
