Corporation tax – Registered social landlord – Charitable purposes – Sections 505 and 506 of Income and Corporation Taxes Act 1988 – Whether appellant registered social landlord entitled to charitable exemption from corporation tax for period prior to registration as charity – Whether objects of appellant wholly charitable where memorandum and articles requiring those objects to be carried out for benefit of the community – Appeal dismissed
The appellant was a limited company formed in 2001 and registered in 2002 as a social landlord within Part I of the Housing Act 1996. As set out in its memorandum and articles of association, its objects were the business of providing housing, accommodation, assistance to help house people, associated facilities and amenities and “any other object that can be carried out by a company registered as a social landlord with the Housing Corporation”, for the benefit of the community; it was not to trade for profit. In 2002, St Helens Metropolitan Borough Council sold some of its housing stock to the appellant under the government’s large-scale voluntary transfer programme. A development works agreement provided for the council to pay an agreed sum to the respondent to carry out certain works of repair and refurbishment to the housing stock. In 2004, the appellant was registered as a charity.
The respondents subsequently assessed the appellant for corporation tax in the sum of £6m for two accounting periods from 2002 to 2004, prior to the appellant’s registration as a charity. They took the view that, during the relevant periods, the appellant was running two businesses, a Schedule A business concerned with the provision of housing and a distinct Schedule D business concerned with the provision of works to the council under the development works agreement. That approach meant that the appellant could not offset the refurbishment costs against the Schedule A profits, with the result that those profits were liable to corporation tax for the relevant accounting periods in the absence of any charitable exemption.
The appellant appealed to the first-tier tribunal (FTT). It contended that it had charitable status during the relevant period notwithstanding that it was not registered as a charity and that the profits in question had been applied for charitable purposes only, such that it was entitled to exemption from corporation tax under sections 505 and 506 of the Income and Corporation Taxes Act 1988. Rejecting that argument, the FTT held that, on a proper construction of the appellant’s memorandum and articles, it was able to confer private benefit on individual tenants, with the result that it was not established for purposes that were exclusively charitable.
Decision: The appeal was dismissed.
When construing the memorandum and articles of association of a company, the motives and intentions of the company’s founders were irrelevant, as were, in general, the actual activities of the company. However, evidence of the actual activities of an institution could be taken into account where there was doubt or ambiguity as to whether its objects were charitable. In such cases, the actual activities of the institution were considered not for the purpose of construing its constitution, but to assist in assessing whether the implementation of its objects would achieve a charitable result: Incorporated Council of Law Reporting for England and Wales v Attorney-General [1972] Ch 73 (ISLREW) applied.
Each of the appellant’s objects was independent; it could not be said that any one of them was ancillary or subservient to another. Although the principal activity of the appellant was intended to be, and had in fact been, the acquisition of housing stock from the council, its refurbishment and letting to tenants, that principal activity was not the or a “main” object since the appellant could, if it so chose, pursue any of the other permissible objects without reference to its current activities. For example, by reference to section 2(4) of the 1996 Act, it could acquire a house to be disposed of on sale, manage houses or blocks of flats and give advice about the formation or running of housing associations. Although it had to carry out those activities “for the benefit of the community”, within the meaning of its memorandum and articles, the purpose of benefit to the community was not some “foremost” purpose to which the listed objects were subsidiary or ancillary, with no independent existence of their own.
Moreover, a requirement to carry out the objects for the benefit of the community was not sufficient to render them all charitable. Although an object that was beneficial to the community, or of general public utility, would prima facie be regarded as charitable, there was a “line of retreat” by which it might be found not to be charitable at common law if there were grounds for holding that it fell outside the spirit and intendment of the Preamble to the Statute of Elizabeth: Scottish Burial Reform & Cremation Society Ltd v Glasgow City Corporation [1968] AC 138, Williams Trustees v Inland Revenue Commissioners [1947] AC 447 and ISLREW applied; Re South Place Ethical Society [1980] 1 WLR 1565 and Farley v Westminster Bank Ltd [1939] AC 430 considered. Whether a case fell outside the equity of the Statute was to be determined by reference to the case law and its application to the facts of the case. There were cases where an object was, in a broad sense, for the good of the community but where the element of private benefit would disqualify the object from being charitable. A distinction should be drawn between objects that, by their very nature, were beneficial to the community as a whole and those that, in their nature, conferred private benefits on individuals of a kind that were not simply subsidiary to the public benefit: Inland Revenue Commissioners v City of Glasgow Police Athletic Association [1953] AC 380 and Inland Revenue Commissioners v Oldham Training and Enterprise Council [1996] STC 1218 applied.
Applying the foregoing principles, the appellant’s objects could not be seen as exclusively charitable. The object of providing housing was not in itself charitable. There was no finding that the appellant’s allocation policy in fact resulted in homes being allocated only to persons in need, in the sense of being financially deprived or otherwise deserving of charitable support. Although the requirement to act “for the benefit of the community” qualified the objects in the memorandum and articles, they did not limit them to matters that were in themselves charitable, since the benefit to the community could be an indirect benefit flowing from the provision of a private benefit that was not purely ancillary to a charitable objective.
Christopher McCall QC and Matthew Smith (instructed by McGrigors LLP) appeared for the appellant; William Henderson (instructed by the legal department of HMRC) appeared for the respondents.
Sally Dobson, barrister
