Value added tax – Zero-rating – Charity – Building services – Respondent charity constructing building training centre intended for use solely for charitable purpose – Respondent seeking VAT zero-rating for supply of construction services – Appellant commissioners ruling supplies standard-rated – First-tier tribunal allowing respondent’s appeal – Upper Tribunal upholding decision – Appellants appealing – Whether respondent carrying on a business/economic activity – Appeal allowed
The respondent was a company limited by guarantee without a share capital and registered as a charity. Its objects included “the advancement of education in water, outdoor and indoor activities for young people generally”. It arranged for the construction of a training centre on a site which it owned on the River Thames, near Marlow in Buckinghamshire. The training centre was entirely met by donations and grants rather than out of charges to customers. Charges were made for activities and courses having regard to the need to make sure that the activities were affordable for young people and their families, balanced by the need to cover operational costs, after taking account of donated income and volunteers.
The respondent argued that the construction services supplied to it should be zero-rated for VAT purposes because those services related to supplies for a building that was intended for use solely for relevant charitable purposes. The appellant Commissioners of Revenue and Customs issued a ruling that the construction of the centre was standard-rated. The respondent appealed, contending that it qualified for zero-rating. The First-tier Tribunal (FTT) accepted that contention and allowed the appeal on the basis that the respondent was not carrying on an economic activity at the site, and that the building was used solely for a relevant charitable purpose: see [2013] UKFTT 158 (TC). The Upper Tribunal upheld that decision: [2014] UKUT 504 (TCC); [2014] PLSCS 329.
The appellants appealed, contending that the test for determining whether there was an economic activity now focused on whether there was a direct link between the service which the recipient received and the payment which he made, not on the wider context in which the payment was made. If the direct link was not present, there was no economic activity.
Held: The appeal was allowed.
(1) The issue of whether the activities of the respondent amounted to “economic activity” arose in the context of the provision of services to the respondent which it said should be zero-rated under items 2 and 4 of group 5 of schedule 8 to the Value Added Tax Act 1994, in accordance with note (6) thereto. The relevant services were supplied in the course of the construction of a building to be used for the general activities of the respondent. The concept of economic activity was central to the operation of VAT and generally had a wide scope. It was to be given its ordinary meaning, even in the context of zero-rating. Because the relevant zero-rating in this case did not apply where the building was intended to be used for economic activity, giving the concept of economic activity its usual wide scope narrowed the operation of the relevant provision as to zero-rating.
(2) It was only supplies of goods or services “for consideration” which were subject to VAT. There had to be a direct link between the supply and the consideration. If there was no direct link between the supply and the consideration, the question of economic activity did not strictly arise as there was no consideration to form the basis of an assessment to VAT. VAT was charged on the amount of the consideration and it was irrelevant for the purpose of calculating the VAT payable whether the consideration for the supply was above or below the market value of the supply. It was irrelevant for the purpose of calculating the VAT whether the consideration for the supply was at a concessionary rate. A taxable person was a person who carried on any economic activity, whatever the purpose of that activity. If a person supplied goods or services for consideration, i.e. satisfying the test of direct link, there was a rebuttable presumption, or a general rule subject to possible exceptions, that the supply for consideration was an economic activity. The character of the activity was to be judged objectively. The subjective motive of the person making the supply did not influence the identification of the objective character of the supply. A charitable activity could be an economic activity. A non-profit making activity could be an economic activity: Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1, Customs and Excise Commissioners v Lord Fisher [1981] STC 238, Commission v Netherlands (Case C-235/85) [1987] ECR 1471, Customs and Excise Commissioners v Yarburgh Children’s Trust [2002] STC 207, Customs and Excise Commissioners v St Paul’s Community Project Ltd [2005] STC 95 and Commission v Finland (Case C-246/08) [2009] ECR 1-35 10605 applied.
(3) In the present case, the respondent supplied services for consideration. Its supplies were “permanent” as part of an established activity, regularly carried on. There was a direct link between the supplies and the consideration. The supply of services for consideration on a permanent basis was presumed to be an economic activity. Even if the respondent’s motive in supplying the services was more concerned with the benefit of the services to those to whom they were supplied, rather than obtaining consideration, any such motive would not alter the objective character of the supply. It was irrelevant in this case that the consideration for the supply of services was below the market value of the supply and, in some cases, involved a concession. There were no factors, which rebutted the presumption that the respondent’s supply of services was an economic activity and the facts that the respondent was a charity and its activities were non-profit making were not of any significance for that purpose. In all the circumstances, the supply of services by the respondent for consideration was an economic activity. Accordingly, it did not satisfy note (6) to items 2 and 4 in Schedule 8 to the 1994 Act and the construction works were not zero-rated.
Kieron Beale QC and Michael Jones (instructed by Solicitor to HM Revenue and Customs) appeared for the appellants; Roger Thomas QC (instructed by Ashurst) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Commissioners of HM Revenue and Customs v Longridge on the Thames
