DECISION
Introduction
1.
This is an appeal by Longridge on the Thames, a charity (“the
Appellant”) against a decision of The Commissioners for Her Majesty’s Revenue
and Customs (“the Commissioners”) that the supplies made to the Appellant in
relation to the construction of a building on its premises are not zero-rated
supplies. That decision is made in a letter from the Commissioners to the
Appellant dated 4 April 2011, and it was upheld upon review by the
Commissioners as confirmed by them in their letter to the Appellant dated 15
November 2011.
2.
In summary, the Appellant carries on its charitable purposes by the
provision of boating and other water-based courses, activities and facilities
for young people at its premises on the banks of the River Thames. Certain of
those courses, activities and facilities are also provided to adults. The
Appellant, in order to improve its facilities, engaged a contractor to build on
the Appellant’s site a building (“the Training Centre”) comprising, on the
ground floor, toilet, changing and shower facilities, and on the upper floor,
an area to be used primarily for training courses and meetings. The Training
Centre was constructed during 2010. The Appellant considered that the supplies
made by the contractor in constructing the Training Centre should be zero-rated
under Items 2 and 4 of Group 5 of Schedule 8 to the Value Added Tax Act 1994
(“VATA 1994”), on the grounds that the building was intended for use solely for
relevant charitable purposes within the meaning of Note (6) to Group 5, and
approached the Commissioners for confirmation that such was the case to enable
the Appellant to issue the necessary zero-rating certificate to the contractor.
3.
The Commissioners took the view that the nature of the Appellant’s
activities are such as to amount, in whole or in part, to business activities,
and that accordingly the Training Centre was not intended for use solely for
relevant charitable purposes (that is, it was not intended to be used otherwise
than in the course or furtherance of a business). It is against the
Commissioners’ decision to that effect that the Appellant appeals, in its
notice of appeal dated 1 August 2011. The grounds of its appeal are that the Training
Centre is used in the fulfilment of the charity’s core objects, and that
although it charges fees for the courses and other facilities it provides in
pursuing those objects, such courses and facilities are substantially
subsidised by donation income received by the Appellant and also by the time
and skills provided to the Appellant by the large volunteer body which supports
the Appellant.
4.
The issue we have to decide, therefore, is whether or not, at the time
when the relevant supplies were made in the course of the construction of the Training
Centre, that building was intended for use solely for a relevant charitable
purpose, that is to say, for use by the Appellant otherwise than in the course
or furtherance of a business carried on by it.
5.
We are asked to give a decision in principle on this issue. The charge
made by the contractor for constructing the core and shell of the Training
Centre was £760,000, exclusive of VAT, and it appears that the Appellant
incurred further costs in fitting out the building, the supplies for which may
also be zero-rated if the Appellant succeeds with its appeal. Therefore the
amount of VAT in issue is in the order of at least £135,000.
6.
Our decision is that the Training Centre was intended for use by the
Appellant solely for a relevant charitable purpose. Accordingly the
Appellant’s appeal is allowed.
The relevant statutory provisions
7.
It is necessary to consider both the European Union Directive provisions
and the domestic statutory provisions which give effect to the Directive in the
UK in so far as those respective provisions are relevant to this appeal. The
Directive is European Community Council Directive 2006/112/EC, and references
in this decision to an Article are references to an Article of that Directive.
8.
Article 2 provides, so far as relevant, that “the supply of goods for
consideration within the territory of a Member State by a taxable person acting
as such” shall be a transaction which is subject to VAT.
9.
Article 9 is concerned with “taxable persons”. Its significance to this
case is that it introduces the concept of a person carrying on an “economic
activity” (or “business” in the UK legislation, as we shall see) – such a
person is a “taxable person”, and hence within the scope of VAT. Article 9
paragraph 1 provides:
1 “Taxable person” shall mean any person who,
independently, carries out in any place any economic activity, whatever the
purpose or results of that activity.
Any activity of producers, traders or persons
supplying services, including mining and agricultural activities and activities
of the professions, shall be regarded as ‘economic activity’. The exploitation
of tangible or intangible property for the purposes of obtaining income
therefrom on a continuing basis shall in particular be regarded as an economic
activity.
10.
Articles 132 and 133 are headed “Exemptions for certain activities in
the public interest”. The significance of these provisions, as is discussed
below, is that the Commissioners contend that, by reason of the exemption
afforded to certain transactions (including transactions which closely accord
with those carried out by the Appellant), it can be inferred as a matter of
construction that such transactions are in principle an “economic activity” for
the purposes of the Directive.
11.
Article 132, so far as relevant, provides:
1 Member
States shall exempt the following transactions:
...
(h) the supply of
services and goods closely linked to the protection of children and young
persons by bodies governed by public law or by other organisations recognised
by the Member State concerned as being devoted to social wellbeing;
(i) the provision
of children’s or young people’s education, school or university education;
vocational training or retraining, including the supply of services and of
goods closely related thereto, by bodies governed by public law having such as
their aim or by other organisations recognised by the Member State concerned as
having similar objects;
...
(m) the supply of
certain services closely linked to sport or physical education by
non-profit-making organisations to persons taking part in sport or physical
education.
12.
Article 133 permits a Member State at its discretion, to qualify, or
make subject to certain specified conditions, the exemption which otherwise it
is mandatorily required by Article 132 to apply to certain of the transactions
specified in that Article. It provides, so far as relevant:
Member States may make the granting to bodies
other than those governed by public law of each exemption provided for in
points ...(h), (i) ...(m)... of Article 132(1) subject in each individual case
to one or more of the following conditions:
(a) the bodies in question must
not systematically aim to make a profit, and any surpluses nevertheless arising
must not be distributed, but must be assigned to the continuance or improvement
of the services supplied;
(b) ...
(c) those bodies must charge
prices which are approved by the public authorities or which do not exceed such
approved prices or, in respect of those services not subject to approval,
prices lower than those charged for similar services by commercial enterprises
subject to VAT;
(d) the exemptions must not be
likely to cause distortion of competition to the disadvantage of commercial
enterprises subject to VAT.
13.
Section 4, VATA 1994 implements within the UK the terms of Articles 2
and 9. It provides:
4 Scope of VAT on taxable supply
(1) VAT shall be charged on any
supply of goods or services made in the United Kingdom, where it is a taxable
supply made by a taxable person in the course or furtherance of any business
carried on by him.
(2) A taxable supply is a
supply of goods or services made in the United Kingdom other than an exempt
supply.
A “taxable person” is a person who is required to be
registered for VAT purposes (broadly, a person whose supplies on which VAT is
chargeable exceed in value the registration threshold).
14.
We learn from section 94(1), VATA 1994 that: In this Act “business”
includes any trade profession or vocation. It is now settled law that the
concept of “business” as it appears in and is to be understood for the purposes
of the UK VAT legislation accords with the concept of “economic activity” as it
appears in and is to be understood for the purposes of the Directive.
15.
Section 30, VATA 1994 provides for certain supplies by a taxable person
to be taxable at the zero rate. Schedule 8 to VATA 1994 specifies such
supplies, and Group 5 of Schedule 8, headed Construction of Buildings, etc
is relevant for this appeal, and in particular Items 2 and 4:
2 The
supply in the course of the construction of –
(a) a building ...
intended for use solely for ... a relevant charitable purpose; or
(b) ... ,
of any services
related to the construction other than the services of an architect, surveyor
or any person acting as a consultant or in a supervisory capacity.
4 The
supply of building materials to a person to whom the supplier is supplying
services within item 2 ... of this Group which include the incorporation of the
materials into the building (or its site) in question.
16.
The Notes to Group 5 make further provision, and for this appeal Notes
(6), (10) and (12) are relevant:
(6) Use for a relevant charitable purpose
means use by a charity in either or both the following ways, namely –
(a) otherwise
than in the course or furtherance of a business;
(b) as a village
hall or similarly in providing social or recreational facilities for a local
community.
(10)Where
–
(a) part
of a building that is constructed is ... intended for use solely for a
...relevant charitable purpose (and part is not); or
(b) ...
then
in the case of –
(i)
a
grant or other supply relating only to the part so ... intended for that use
(or its site) shall be treated as relating to a building so ...intended for
such use;
(ii)
a
grant or other supply relating only to the part [not] so ... intended for such
use (or its site) shall not be so treated; and
(iii)
any
other grant or other supply relating to, or to any part of, the building (or
its site), an apportionment shall be made to determine the extent to which it
is to be so treated.
(12)Where all or part of a building is intended
for use solely for a ... relevant charitable purpose –
(a) a supply relating to the building (or
any part of it) shall not be taken for the purposes of items 2 and 4 as
relating to a building intended for such use unless it is made to a person who
intends to use the building (or part) for such a purpose; and
(b) a grant or other supply relating to
the building (or any part of it) shall not be taken as relating to a building
intended for such use unless before it is made the person to whom it is made
has given to the person making it a certificate in such form as may be
specified in a notice published by the Commissioners stating that the grant or
other supply (or a specified part of it) so relates.
17.
With regard to Note (12)(b), the Appellant failed to give the relevant
certificate to the person making the construction supplies before those
supplies were made, but the Commissioners take no point against the Appellant
by reason of such failure.
The evidence and the findings of fact
18.
We had in evidence before us a lever arch file of documents comprising
the letter and email correspondence between the parties; the Memorandum of
Association of the Appellant; a plan of the site occupied by the Appellant; various
brochures describing the activities provided by the Appellant and pricing lists
for those activities; extracts from the Appellant’s website at various times;
financial statements and other information analysing the financial performance,
receipts, costs and charges of the Appellant as attributed to its different
activities and the consequences of accounting for the contribution of its
volunteers; spreadsheets showing the use of the facilities provided by the
Appellant and also the use of the Training Centre, together with charges made
to users; the planning consent given for the construction of the Training
Centre; papers relating to the funding of the construction of the Training
Centre by grant-making and charitable institutions; and the construction
contract and itemised building costs for the Training Centre.
19.
There were two witnesses who appeared before us for the Appellant,
Amanda Foister and Julian Fulbrook. Both witnesses had prepared a witness
statement, and at the hearing they gave further evidence in chief. Both
witnesses were cross-examined by Mr Jones, who appeared for the Commissioners.
No witnesses appeared for the Commissioners.
20.
Miss Foister is the chief executive officer of the Appellant, and has
held that position since January 2010. Her responsibilities are to manage the
Appellant as directed by its board of trustees. Miss Foister’s evidence
related to the following matters: the Appellant’s premises, including the
Training Centre; the financing of the construction of the Training Centre; the
nature of the facilities provided by the Training Centre and the use made of
the building and its facilities (both as to the activities carried on there and
the identity of the persons using the building); the financial arrangements of
the Appellant and its accounting policies; the prices charged by the Appellant
for the different activities it provides and the extent to which different
classes of users are subsidised by the Appellant; the extent to which corporate
and adult users make use of the Appellant’s facilities generally and the
Training Centre in particular, and the charges made to such users; the
significance to the Appellant and to its activities of donation income and of the
contributions of time and skills by volunteer instructors and others; and the
comparison between the charges made by the Appellant and those charges for
similar activities and facilities made by local authorities and commercial
organisations.
21.
Mr Fulbrook is a former Dean of Graduate Studies at the London School of
Economics and Political Science. He is a trustee of the Appellant and has
acted as a volunteer canoe coach and aquatic first aid instructor for the
Appellant (and before that for the predecessor organisation which provided
activities at the premises). Mr Fulbrook’s evidence related to the following
matters: the history of the provision of water activities at the Longridge
site; the acquisition of the site and premises by the Appellant in 2005; his
contributions as a volunteer coach and as a trustee; the reasons for the
construction of the Training Centre and the trustees’ intentions as to the use
of the Training Centre; the layout of the Training Centre and the facilities it
provides; the actual use made of the Training Centre; the principles and
subsidies applied by the trustees in setting the prices and fees which the
Appellant charges for use of its facilities and the courses it provides; the
significance to the Appellant’s activities and financial standing of the
contributions made by volunteers; the significance of donations for meeting
operational costs and funding capital projects; and the running of the
Appellant in a financially sound and prudent manner in accordance with guidance
published by the Charity Commission.
22.
Both witnesses were credible, and we accept their evidence. As the case
developed in the course of the hearing a great deal of attention was directed
at the financial information exhibited to Miss Foister’s evidence, particularly
with regard to the cost of certain activities provided by the Appellant, the
extent of subsidy provided the Appellant, and the financial effect of
contributions made by volunteers who support the Appellant by providing their
time and skills. Miss Foister had not, it appeared, compiled all of this
financial information herself, and she had some difficulty in explaining the
detail of certain parts of this evidence. Although this presented us with some
difficulty in our understanding of what we regard as an area of crucial
significance to the case, and although the Appellant’s case may have been
better served had it led witness evidence more directly concerned with these
matters, the financial information as exhibited to Miss Foister’s witness
statement was nevertheless adequate to enable us to reach a conclusion as to
the broad effect and extent of the subsidy provided by the Appellant and of the
value to it in carrying out its activities of the time and skills contributed
by its volunteers.
23.
Our findings of fact from the evidence are set out in the following
paragraphs [24] to [56].
24.
The Appellant is a company limited by guarantee and not having a share
capital. It is a registered charity. It was formed in 2007 as the successor
to a charitable trust which in September 2005 acquired by purchase from the
Scout Association the Longridge site (then used as a scout campsite and centre
for water activities).
25.
The objects of the Appellant are:
(1)
To safeguard and promote Longridge as a centre of excellence for the
advancement of education in water, outdoor and indoor activities for young
people generally, and for purposes related thereto such as coaching, leadership
and training in water and other activities; and
(2)
To promote the development of young people in achieving their full
physical, intellectual, social and spiritual potential as individuals, as
responsible citizens and as members of their local, national and international
communities.
26.
Included in the powers of the Appellant is the power “to acquire by
purchase the freehold interest in Longridge from The Scout Association and to
hold it in trust as an activity centre primarily for young people and to improve
such property or any interest therein”.
27.
The Longridge site is on the banks of the River Thames near Marlow in
Buckinghamshire. On the site there are areas for campsites; a games field; a
ropes course, climbing wall and “Jacob’s ladder”; an area for go-karting; a
“giant swing”; waterfront landing stages; and buildings for storing craft and
equipment for the various water-based activities provided by the Appellant.
There is a building which provides overnight accommodation for young people’s
groups visiting the site and taking courses provided by the Appellant; a youth
club; a reception area; and a cafe. There is also the Training Centre.
28.
When the Longridge site was acquired from the Scout Association, the
trustees saw the need to bring its facilities and infrastructure up to modern
standards. A particular and urgent need was to provide toilets, showers and
changing rooms for girls as well as for boys, and to provide such facilities to
a standard compliant with legislation requiring provision for persons with
disabilities.
29.
The trustees decided to add training and meeting rooms to the proposed
toilet and shower block, in part to provide a building more attractive to
potential donors and in part to meet the requirements of the planning
authority, which was unwilling to permit an increase in the buildings
“footprint” on the site. Thus the Training Centre comprises the toilet, shower
and changing room facilities on the ground, or lower, floor and the training
and meeting room facilities on the first, or upper, floor. Various
outbuildings on the site previously used for training purposes were demolished.
30.
Notwithstanding that the primary purpose of constructing the lower floor
toilet and shower facilities was to provide such facilities for their use by
children and young people attending courses provided by the Appellant, at the
time that the Training Centre was commissioned and built, the trustees’
intention was that anyone on the Longridge site would be able to use those
toilet and shower facilities. As mentioned below, in practice these facilities
have proved to be usable only by children and young people.
31.
The trustees’ intention was that the upper floor should provide indoor
space to be used as an adjunct to the various courses and activities provided
on the site by the Appellant – for example the training, theory or de-briefing
part of boating courses; first aid courses; or as shelter for campers in very
wet weather. The building includes at upper floor level a covered balcony which
provides at ground floor level a large roof overhang area giving outdoor
shelter for some land-based activities. Since February 2012 the upper floor has
been divided into three rooms, but the Appellant did not have sufficient funds
to complete it. In particular, the upper floor has no heating, so that outdoor
clothes are required by those using it during significant parts of the year.
32.
Prior to the construction of the Training Centre the Appellant had
advertised on its website that, in conjunction with two nearby hotels, it could
provide residential conferences and product launch events for corporate users.
The Appellant’s current website and promotional literature includes a
photograph of the upper floor room space and speaks of “a beautiful space that
will comfortably hold 120 people sitting, up to 200 standing” which is
available for hire “for larger parties, conferences, meetings and receptions”.
This promotion of the upper floor followed a booking of the space by a
corporate user for such purpose in March 2011 (shortly after the Training
Centre was opened), and following that event there had been some hope that the
upper floor would generate income from corporate and adult users which would
help subsidise the activities provided for young people, but that has not
transpired: during the months when the upper floor could be used for such
purposes it is fully used for youth activities. In any event, apart from that one
occasion, no enquiries have been received for possible use of the upper floor
for corporate hospitality purposes. Details of actual usage of the upper floor
are set out below.
33.
Planning permission for the construction of the Training Centre was
given on 13 August 2009. Conditions included in the planning permission
stipulated that the rooms on the upper floor should be used “solely for
purposes which are incidental to the use of Longridge; namely, briefing and
training sessions associated with boating activities and water-based activities
at Longridge; storage space associated with boating activities and water-based
activities at Longridge.”
34.
The cost of the construction of the Training Centre was entirely met by
donations and grants: this was a requirement of the trustees, who did not wish
that any part of the construction costs should be met out of charges (or
increased charges) made by the Appellant for the activities it provides. A
principal donor was Sport England.
35.
The construction contract is dated 16 December 2009, with the Appellant
as the employer and Blue Forest (UK) Ltd as the contractor. It is a “design
and build” contract for the provision by the contractor of a “new training
centre including wcs, shower, changing and meeting rooms” at the Longridge
site. The Appellant is required to pay the contractor for the works the sum,
exclusive of VAT, of £760,000. The date for completion of the works is 30 June
2010.
36.
The Appellant provides a wide range of day and residential courses and
activities principally (but not exclusively) based on water-borne activities,
for schools and colleges, scout, guide, cadet and youth groups, individual
young people, families and birthday party groups, and adults (individually, in
groups, or by corporate use). Corporate use takes place when the facilities
are not being used by young people or families. In addition, on occasion
during the summer the Appellant organises special day events. The principal
water activities are dinghy sailing, kayaking, canoeing, rowing and sculling,
bell-boating and dragon boating, and rafting. For all courses and most
activities the Appellant provides an appropriately qualified instructor (either
a paid employee or contractor, or a volunteer). Courses for adults include
coaching courses. Courses are accredited by a range of organisations.
37.
Accommodation is provided in the form of space for camping, bunk-house
accommodation, some single rooms and a building which can be used as a
dormitory. Meals are provided at the cafe on the site.
38.
All activity “packages” and courses are provided at specified prices set
out in the extensive price list published by the Appellant each year. These
charges are set each year by the trustees having regard to the charitable
objects of the Appellant; the affordability of charges for young people and
their families; and the need for the Appellant to cover its operational costs
after taking account of donated income and the services provided by volunteers.
The aim of the trustees is to try to get young people, at a subsidised cost,
interested and occupied in boating activities. All capital projects undertaken
by the Appellant are paid for from donated income, and not out of charges made
to persons for activities and courses.
39.
A person or group booking an activity or course does so subject to the
Appellant’s terms and conditions. The conditions as to payment require payment
in full on booking (or a 30% deposit in the case of larger groups and school
parties, with full payment not later than six weeks prior to the event).
Cancellations made by a customer in the six week period prior to the event
result in forfeiture of the fee paid, and a cancellation prior to that period
results in forfeiture of any deposit paid.
40.
In the case of those activities or courses which are available for young
people, families and adults there will typically be a three tier pricing
structure. Thus, by way of example, the 2012 pricing brochure lists kayaking
with an instructor (equipment provided, and based on a group of 8 persons), for
which the charge is £70 for youth groups, £80 for families, and £100 for adult
groups (including those who come as a “corporate” group). In the case of youth
groups the Appellant may offer discounts to the published price, or waive the
charge entirely. This is the case, for example, with groups of young people
with physical disabilities or other special needs. Campsite and other
accommodation charges are also subsidised. Certain adult users will also be
offered discounts on the published price (students, disabled persons, volunteer
supporters of the Appellant, and those categorised as not in education, employment
or training). The charges made for families also include an element of
discount for adults in the family group as well as children: this is in
recognition of the fact that children attending in a family group will require
supervision by the adult members of the family group.
41.
There are local authority and commercial organisations which provide
activities and courses comparable to those provided by the Appellant. Their
charges for activities equating to kayaking provided for youth groups (for
which the Appellant charges no more than £70) range between £80 and £128 (local
authority) and £90 and £95 (commercial organisations).
42.
In the case of kayaking provided for youth groups, the actual
operational costs to the Appellant of running the activity amount to £80, so
that the Appellant is required to subsidise from donated income or from any
surplus arising from charges to adult groups, the deficit (against charges of
£70 or less) of £10 (or more in cases where a further discount is given by the
Appellant).
43.
In the case of kayaking provided for adult groups, where the charge is
£100, the actual operational costs to the Appellant of running the activity
amount to £90, giving a surplus of £10.
44.
A substantial number of volunteers contribute without charge their time
and skills to the Appellant for the purposes of the courses and activities it
provides. Such volunteers are mainly acting as instructors (who are in
addition to the paid full time instructors engaged by the Appellant), but there
are also volunteers who assist with maintenance of premises and equipment and
in administration and financial accounting.
45.
An objective of the Appellant in providing activities and courses for
adults is to provide an opportunity whereby some of those attending may be
encouraged to become volunteers: the Appellant regards such matters as part of
its charitable purpose of providing coaching, leadership and training in water
and other activities in relation to the advancement of education in water and
related activities for young people.
46.
The Accounting Standards Board, in its Interpretation for Public Benefit
Entities of the Statement of Principles for Financial Reporting issued in May
2007, provides recommendations for the accounting treatment by charities and
other public benefit entities of “donated services” such as those comprising
volunteers’ time. Its recommendation is that provided such services can be
reliably measured, their estimated value (to the extent they would normally
otherwise have been purchased) should be recognised in the financial statements
of the charity as donated income and also as expenditure of an equal amount.
47.
The Appellant does not follow this recommendation, but it calculates
that if, in respect of kayaking for youth groups and for adult groups, it added
to the actual operational costs (£80 and £90 respectively) the expense (on this
recommended basis) of the value of volunteers and of donated equipment, the
resulting cost of providing those activities would increase from £80 to £114
(youth groups) and from £90 to £124 (adult groups). The matching income item
required by the Accounting Standards Board recommendation for such donated
services and goods would be brought into account as donated income (and not as
charges for the activities provided).
48.
The Appellant’s financial statements show that for each year from and
including its 06/07 year, the Appellant has shown a deficit on its operating
activities, ranging from £95,400 in 2007/08 to £16,630 in 2010/11 (in some
years depreciation of capital assets and the costs of redundancies have
increased further the deficit on all activities). In each year donated income
for ongoing activities (that is, disregarding donations for capital projects)
has at least equalled the deficit accruing on activities.
49.
As mentioned, the Appellant does not account for the value of volunteer
contributions in accordance with the recommendation of the Accounting Standards
Board. We infer from the information before us (including the limited exercise
of accounting for volunteer services which the Appellant carried out for the
purposes of its reporting to Sport England) that if the Appellant followed that
recommendation the re-stated financial statements would show an increase in the
deficit on its operating activities with a corresponding increase in donated
income. The surplus each year, after taking into account donated income, would
remain the same.
50.
An analysis of the Appellant’s financial statements for its year
2010/11shows that total income from all its subsidised activities (that is, all
young people’s activities, family activities, and those adults for whom a
discount on the published price is given) was £580,883, and that the cost of
providing those activities (disregarding the value of volunteer time) was £655,498.
That analysis also shows that the total income from activities provided to all
other adults (including those participating as a “corporate team”) was £61,998
and that the cost of providing those activities was £53,476 (this figure also
disregards the value of volunteer time – the evidence was that in the case of
activities provided for adults, a higher proportion of instructor/training
input would be by way of paid instructors, but that where volunteers were used,
they would be the more experienced volunteers – and hence have a higher “value”).
51.
An analysis of those who took part in the range of activities and
courses provided by the Appellant during the period from 1 January 2012 to 25
November 2012 shows that 27,119 individuals took part, of whom 17,895 were
young people who paid no charge or a charge discounted by 20% or more; 7,786
were young people who paid a charge discounted by up to 20%; 1,111 were adults
who paid a discounted charge, and 327 (1.21%) were adults who paid a charge
without any discount.
52.
As to the specific use of the Training Centre, a schedule of users of
the upper floor for the period from 16 October 2010 to 26 June 2012 shows that
during that period 5,806 persons used the upper floor of whom 240 were persons
comprising “corporate teams” (4.13% of total users). All other users were individuals
or groups whose activities are subsidised by the Appellant, being youth groups,
school groups, volunteers supporting the Appellant, and, on five occasions,
family groups. The use by volunteers ranged from use for training purposes to
use for social activities.
53.
Corporate use of the upper floor of the Training Centre took place on
three occasions. On one occasion (as mentioned in [32] above) 120 people used
the Training Centre for a corporate hospitality event (for which the Appellant
charged £250); on the second occasion 60 people used the Training Centre as
part of a “team day” using the other facilities provided by the Appellant (for
the use of the Training Centre the Appellant charged £50); and on the third occasion
60 people used the Training Centre as storage space for their belongings whilst
they used the other facilities provided by the Appellant (for the use of the
Training Centre the Appellant charged £80).
54.
For approximately 40% of the occasions on which the upper floor of the
Training Centre was used during this period the Appellant made no charge to the
users of the Training Centre. Where a charge was made it was usually made for
a nominal amount (£50 or less). Total charges for use during the period were
£2,455, of which £380 (15.48% of the total) comprised the charges for the three
occasions of corporate use.
55.
The principal objective of the lower floor of the Training Centre was to
provide adequate and modern toilet, shower and changing room facilities for
children and young people participating in the activities provided by the
Appellant. It was originally intended that there would be some use of such
facilities by adults, and limited separate provision was made for adults.
However, once the facilities came into use it proved impractical for adults to
use the lower floor facilities: there are issues of maintaining separation of
adults from children for child protection purposes; and (given the constant
presence of mud which characterises most of the activities which children and
young people undertake on the Appellant’s premises) the facilities cannot be
maintained to a standard which adults are prepared to accept. Adults are
therefore directed to use other facilities on the Appellant’s site (in particular,
those included with the residential accommodation). It is the case that adults
are not prevented from using the lower floor facilities: but it is very
unlikely that they would do so. For corporate teams which use the Appellant’s
premises special arrangements are made for them to use facilities at a nearby
hotel.
56.
No record is maintained of users of the lower floor of the Training
Centre, but as a general statement they will be children and young people who
are attending courses provided by the Appellant or otherwise taking part in the
activities available on the site. Use of the lower floor is a distinct matter from
use of the upper floor: there may be some overlap (for example, if the
instruction part of a course on the site is carried out on the upper floor).
The Appellant’s submissions
57.
Mr Thomas appeared for the Appellant.
58.
The Appellant argued in its principal submission that the Training
Centre, as an integral part of the site, is used to further its charitable
activities in terms of providing facilities which enable those activities to be
better carried out. The predominant purpose of its activities is not to
receive consideration for providing those activities, but to fulfil its
charitable objects of promoting the development and welfare of young people
through their education in water-based activities and related purposes
including coaching, training and leadership. Therefore, by reference to the
European and UK jurisprudence, the Appellant is not carrying an “economic
activity” (in the terms of the Directive) or making a supply “in the course or
furtherance of any business” (in the terms of VATA 1994).
59.
The Appellant also rejected any argument that, even if its activities
generally are “non-business”, particular use of the upper floor of the Training
Centre shows that the building was not intended to be used solely for a
relevant charitable purpose.
60.
In making the Appellant’s principal submission Mr Thomas referred first
to the European cases on what constitutes an “economic activity” for the
purposes of Articles 2 and 9 of the Directive. Those cases show, he argued,
that if a supply is provided for a consideration, that in itself does not mean
that the supply is by way of an economic activity – it is necessary to determine
the predominant concern of the activity. To determine that predominant concern
it is necessary to look at the nature of the item exploited; the context in
which the activity is performed; and the manner in which the activity is
performed.
61.
Thus in Floridienne SA and another v Belgian State (Case C-142/99)
[2000] STC 1044 the Court of Justice held that a loan by a holding company to a
subsidiary may be an economic activity (that is, the exploitation of property
for the purposes of obtaining income therefrom on a continuing basis, in the
language of Article 9), but only where such activity “is carried out with a
business or commercial purpose characterised by, in particular, a concern to
maximise returns on capital investment.” (at [28]). In Banque Bruxelles
Lambert SA (BBL) v Belgian State (Case C-8/03) [2004] STC 1643 in his
opinion Advocate General Maduro cites the Floridienne case as authority
for the proposition that: “‘economic activity’ must therefore be construed as
meaning an activity likely to be carried out by a private undertaking on
a market, organised within a professional framework and generally
performed in the interest of generating profit.”
62.
Mr Thomas also relied on the earlier case of European Commission v
French Republic (Case 50/87) [1988] ECR 4797, where the issue was whether
the lessor of property let at a rent reduced by subsidy was entitled to recover
input tax. The Court of Justice held that the leasing of premises in such
circumstances did not constitute an economic activity within the meaning of the
Directive (at [21]).
63.
The Appellant argued that the UK cases are consistent with this
approach. We were referred to Customs & Excise Commissioners v Lord
Fisher [1981] STC 238 and the discussion of that case in the House of Lords
decision in Institute of Chartered Accountants in England and Wales v Customs & Excise Commissioners [1999] STC 398. There is reference to
the six indicia suggested as the test to determine the question of whether an
activity amounts to a business (Mr Thomas argued that the use of such indicia
was not approved by the House of Lords, but he accepted that subsequent cases
have used them as a convenient means to approach that question). Those
indicia, as summarised by Lord Slynn in the ICAEW case are whether the
activity is: a serious undertaking earnestly pursued; pursued with reasonable
continuity; substantial in amount; conducted regularly on sound recognised
business principles; predominantly concerned with the making of taxable
supplies to consumers for a consideration; and such as consisted of taxable
supplies of a kind commonly made by those who seek to make profit from them.
64.
The Appellant placed particular reliance on two cases where, in effect,
the issue was whether a charity which made some charges for the services it
provided in furtherance of its charitable activities was using a building in
the course or furtherance of a business which it carried on. Thus in both Customs
& Excise Commissioners v Yarburgh Children’s Trust [2002] STC 207 and Customs
& Excise Commissioners v St Paul’s Community Project [2005] STC 96 the
charity’s purpose was to provide, at the most affordable cost possible, nursery
or playschool places to children, and it charged fees only to the extent
required to meet its costs after taking account of grants and donated income.
In both cases it was held not to be carrying on a business since, having regard
to the wider enquiry which must be made in such cases, the predominant purpose
or concern, or the context in which it charged fees, was to fulfil its charitable
purposes, rather than to make taxable supplies for a consideration. The
judgments in both cases drew on the European jurisprudence, and in particular
the Floridienne and French Republic cases.
65.
Turning to the circumstances of the Appellant in the present case, Mr
Thomas argued that, in different ways, both the upper floor and the lower floor
of the Training Centre were intended to be used (and in fact are used) as part
and parcel of the facilities provided by the Appellant in the pursuit of its
charitable activities, as required by the conditions attached to the planning
consent for the building. Where charges have been made for the use of the
upper floor (and in all but a few cases there is no charge, or a nominal charge
only) it cannot be said that there is an aim to seek a return on capital
invested, or any other hallmark of economic activity.
66.
As to the contention that the Appellant, in charging for the activities
it is providing, is carrying on a business or economic activity, the evidence
establishes that all its courses and activities for children and young people
and for family groups are provided at a loss, in that the charges made fall
short of the actual expense to the Appellant of providing the courses. In less
than 1.5% of cases (courses supplied to adults where there is no discount (and
this includes “corporate team” users), who in any event do not use the
facilities of the Training Centre) the actual costs of the courses and
activities are met or exceeded by charges made. Moreover, if there is proper
accounting for volunteer time as recommended by the Accounting Standards Board
it is the case that the true cost of providing all activities exceeds the
charges which the Appellant makes – the resulting deficit is made good by the
value of donated volunteer time and by donated income and grants.
67.
It is not a characteristic of a business activity, so the Appellant
submits, that it should be dependent upon time devoted by volunteers and funds
donated by supporters. Even if the other five indicia derived from the Lord
Fisher case could be said to be satisfied, the key factor, that of a
predominant purpose or concern of making supplies to consumers for a
consideration, is not satisfied in the Appellant’s case. The predominant
concern of the Appellant in providing its courses and activities, of which the
Training Centre forms part, is to fulfil its charitable purposes. Accordingly
the supplies made in the course of the construction of the Training Centre were
made in the course of the construction of a building intended for use solely
for a relevant charitable purpose, being otherwise than in the course or
furtherance of a business.
68.
The Appellant’s secondary submission is that even if some use of the
upper floor comprises use by corporate users outside the scope of the
charitable purposes of the Appellant, such use (if it is properly characterised
as business use) is to be disregarded by the application of the de minimis
rule, since the number of such users is less than 5% of the total number of
persons using the upper floor in the period since it was constructed. The
recent case of Wakefield College v HMRC [2012] STC 642 demonstrates that
the de minimis rule is a rule of statutory interpretation, so that in
construing item 2 of Group 5 of Schedule 8 to VATA 1994 (which refers to the
construction of a building intended for use solely for a relevant
charitable purpose) any de minimis use is to be disregarded.
69.
Mr Thomas referred us to Note (10) to Group 5. Given the different
respective functions of the upper and lower floors, if the tribunal were to
find that the upper floor was used in the course of a business, but the lower
floor was not (because its use is effectively restricted to children and young
people), the provisions of Note (10) would allow an appropriate apportionment
to be made with regard to the construction supplies.
The Commissioners’ submissions
70.
Mr Jones appeared for the Commissioners.
71.
The Commissioners’ principal submission related to the activities of the
Appellant. Mr Jones argued that its activities, notwithstanding that for the
most part they were in pursuit of the Appellant’s charitable purposes,
comprised an “economic activity”, or the carrying on of a business, so that the
use of the Training Centre, whether by young people or adults, and whether in
relation to courses or extraneous matters such as corporate events, was use in
the course of a business. Accordingly, the construction supplies made to the
Appellant in relation to the Training Centre were not eligible for zero-rating.
72.
Mr Jones had an alternative submission in relation to the actual use
made of the Training Centre, and in particular the upper floor. He submitted
that since it was intended that, in order to subsidise the Appellant’s other
activities, the Training Centre should be used, in part, by those who would pay
a commercial rate for such use (adult and business users), it was intended that
it should be used in the course of a business carried on by the Appellant.
73.
With regard to his principal submission, Mr Jones referred to Article
9(1) of the Directive, pointing out that in determining whether any activity is
an “economic activity” it is necessary, first, to look to the activity and then
to determine objectively (in the terms of Article 9(1), “whatever the purpose
or results of that activity”) whether that activity has the characteristics of
a business: Commission of the European Communities v Kingdom of the
Netherlands (Case 235/85) [1987] ECR 1471.
74.
There is a presumption that any supply of goods or services in return
for a consideration amounts to an economic activity, and this is so even if
there is no intention to make a profit, or where services are subsidised: Riverside
Housing Association Ltd v HMRC [2006] STC 2072; Customs & Excise
Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC
1; and Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655.
75.
Further support for this presumption is found within the terms of the
Directive itself, in Mr Jones’s submission. Article 132 sets out a number of
supplies which Member States are required to exempt from tax: most relevantly
for the present case, supplies which are linked to welfare and social security
work; the provision of education for children and young people; and the supply
of services closely linked to sport or physical education by non-profit-making
organisations. Moreover, Article 133 permits Member States to restrict the
application of those exemptions to bodies which do not aim to make a profit or
which charge prices below the commercial rate. As is noted in the Riverside
Housing Association case, there would be no need to provide for such
exemption (or an exemption restricted as provided in Article 133) if activities
of that kind were not inherently to be regarded as an “economic activity”.
76.
Therefore the onus is on the Appellant to show that the nature of its
activities is such that it is not carrying on an economic activity,
notwithstanding that it is supplying services for a consideration. On the
facts the Appellant is acting in a business-like manner: it is active on a
considerable scale; it has sophisticated and commercial terms of business; it
is professionally managed by a full-time CEO and fundraiser who operates within
a business plan; in the most recent years operating income of the Appellant has
been between 80% and 98% of operating expenses (disregarding the effect of
volunteer donated time, which the Appellant did not account for); it seeks out
customers beyond its charitable remit whose fees will subsidise the provision
of activities to those within its charitable remit; and the type of activities
it provides, and the way in which it provides them, are consistent with those
provided (and the way they are provided) by commercial providers.
77.
Therefore, if one applies the indicia derived from the Lord Fisher
case the only conclusion on the facts is that the Appellant’s activities
comprise a business: its activities comprise a serious undertaking earnestly
pursued; those activities are pursued on a continual basis; the activities are
of commercial substance in terms of the charges made and the extent to which
those charges go towards meeting the costs of providing the courses and
activities; the activities are conducted on recognised business principles with
care and prudence as to financial management; viewed objectively, the
Appellant’s activities comprise the provision of services to consumers for a
consideration – it is irrelevant that this is done in pursuance of the
Appellant’s charitable objectives, since the activity must be assessed
“whatever the purpose or results of that activity”; and the supplies made by
the Appellant are of a kind similar to those made by commercial operators.
78.
It is therefore the case that the Appellant provides services to
consumers in return for a consideration, and does so in a business-like
manner. It is irrelevant that its motive for doing so is to fulfil its
charitable objectives: whatever its objectives, its activities, in the manner
in which it chooses to carry them out, and whether or not they are recreational
or educational in nature, comprise an “economic activity”.
79.
Mr Jones was prepared to accept that the Appellant used the services of
volunteers, but he questioned the reliability of certain of the financial
information put forward in evidence by the Appellant with regard to the
identifiable costs of carrying out individual activities and in particular the
“true cost” calculated by reference to the value of time donated by volunteers
– he characterised that evidence as little more than a rough and ready
reckoning of such costs. The evidence based on the audited accounts (where
there is no accounting for the value of volunteer donated time) is that the
Appellant does to a limited extent subsidise the costs of providing courses and
activities for children and young people, but does not do so for courses and
activities provided to adults (charges for which are about ten per cent of all
charges, by reference to the 2010/11 financial statements).
80.
In the Commissioners’ submission the Appellant cannot rely on the Yarburgh
and St Paul’s Community Project cases, where the facts were quite
different, with co-operative ventures run by beneficiaries (and in the St
Paul’s Community Project case, the nursery undertaken for the social
reasons of providing nursery education for disadvantaged and difficult
children). Those cases (in the High Court) are concerned only with whether the
tribunal could reasonably reach the conclusion that it did on the facts, and to
the extent that they decide that a charity is not carrying on a business if its
predominant concern in carrying on a particular activity is to pursue its
charitable purposes, then they are wrongly decided: the question is whether the
activities objectively are of a business nature, regardless of the purpose for
which they are undertaken. In neither of those cases was the court directed to
Articles 132 and 133 of the Directive.
81.
As to the Commissioners’ alternative submission, there is evidence
(particularly from the website) that the intention of the Appellant, when it
entered into the construction contract for the Training Centre, was that the
upper floor would attract adult and corporate users, providing a source of
income which would help in the subsidy of activities within the Appellant’s charitable
remit. It is the case that, as it turned out, there was little by way of such
use of the upper floor, but the question for the tribunal is to determine the
intention of the person to whom the construction supplies are made at the time
of those supplies. The Commissioners argue that the tribunal should find, with
regard to the upper floor, that there was an intention to use that part of the
Training Centre for a business use, so that, applying the apportionment
provisions, supplies attributable to the construction of the upper floor should
be taxed at the standard rate.
Discussion and conclusions
82.
The issue to be determined is whether or not, at the time when the
relevant supplies of construction were being made to the Appellant, the
Appellant intended to use the Training Centre solely for a relevant charitable
purpose, that is, otherwise than in the course or furtherance of a business
carried on by it. We are required to look to the intention as to use at the
time the construction supplies were made, not actual use once the building is
constructed: HMRC v Fenwood Developments Ltd [2006] STC 644: we
consider, however, that actual use will give some guidance as to the use intended
in the absence of unequivocal evidence as to intention at the time the supplies
were made.
83.
The principal matter argued by the parties was the question of whether,
in carrying out its activities generally, the Appellant was carrying on a
business. If it is assumed that the Training Centre was intended to be used
only for the purpose of enabling the Appellant to carry out its activities (an
assumption which is the subject of the secondary submissions of the parties,
which we deal with below), then the Appellant can succeed only if it can
establish that those activities do not comprise an economic activity, that is
to say, the carrying on of a business for VAT purposes.
84.
The Appellant is a charity, and in relation to most of its activities
the parties are agreed that its activities are by way of direct promotion of
its charitable objectives (set out in paragraph [25] above). We were not given
the figures for the period when the trustees were planning to construct the
Training Centre, but there is no reason to conclude that matters were
materially different from how they stood in the period 1 January 2012 to 25
November 2012, for which we were given the figures. These show (see paragraph
[51] above) that 94.5% of those using the Appellant’s facilities were young
people. Of the 1,438 adults comprising the remaining 5.5%, 1,111 were adults
whose use was subsidised, and 327 were adults who paid a charge without
discount (for the most part they were “corporate users”). As to income, for
the Appellant’s financial year 2010/11 the adults who paid a charge without
discount accounted for just under 10% of total income from courses and other
activities provided by the Appellant (see paragraph [50] above); that figure is
a reflection upon the extent of the subsidy provided to all other users.
85.
The Appellant claims that even in those cases where it is providing
courses or activities to adults, such provision is in large part in pursuance
of its charitable objects, since the provision of coaching, leadership and
training courses to adults (where that is to the end of educating young people
in water and similar activities) is within its stated purposes. It argues that
where there is no training element in the activities it provides to adults, an
objective is to seek out and encourage potential volunteers for the Appellant’s
work. Whilst accepting this is the case, we further conclude that the
Appellant also regarded adult groups (especially those attending as “corporate
users”) as a source of income obtained when its facilities were not otherwise
likely to be used by young people and which would give rise to a surplus, after
operational expenses, which would be available by way of subsidy of its work
with young people.
86.
Therefore, if it were crucial to decide the issue before us, we would
have to find that whilst by far the greater part of the Appellant’s activities is
directly by way of carrying out its charitable objectives, a small part is not,
although they do further those objectives by raising funds to subsidise the
Appellant’s charitable work (at least, if the value of volunteer contributions
are ignored, as we mention below). That some limited part of the Appellant’s
activities are seemingly for the purpose of raising funds for such subsidy rather
than to carry out directly its charitable objects may shed some light on the
question of whether the Appellant is engaged in an economic activity, as we
mention below, but it is not a determining factor.
87.
This is so because, as Mr Jones rightly points out, in deciding whether
a person is engaged in an economic activity, that judgment is to be made objectively,
without reference to “the purpose and results of that activity”, as Article
9(1) specifies, and as the Court of Justice confirmed in the case of Kingdom
of the Netherlands. Mr Jones gave us the example of two institutions
providing private education, one established as a charity and the other not.
The fact that one of them is carrying out its charitable purposes cannot be the
determining factor in deciding the question of whether it is engaged in an
economic activity. What is required is to have regard to the nature of the
activity, not the motive for it. For the same reason, the question is not
determined by whether the purpose, or a purpose, of the activity is to make a
profit – if by its nature the activity is an economic activity, the absence of
a profit motive does not of itself result in it becoming something other than
an economic activity: see, for example the case of Morrison’s Academy
Boarding Houses Association. This objective approach ensures that there is
tax neutrality as between activities which are inherently the same in character,
even if they are differently motivated.
88.
Mr Jones also argues that in determining the nature of an activity,
there is a presumption that if the activity comprises a supply of goods or
services for consideration, then the activity amounts to an economic activity.
There may be such a presumption by reason of Article 2 and also implicit in the
terms of Article 9(1), but it is no more than a presumption, and is not
the defining characteristic in determining the nature of an activity. As
Patten J says in the Yarburgh Trust case (at [22]): “It seems to me that
the balance of authority is against treating a transaction or activity as
economic or as part of a business merely because it results in a consideration
or produces income.” He later says (at [23]) that the fact that a service was
provided at a price “is the beginning not the end of the inquiry” as to whether
activities comprise an economic activity.
89.
It is worth quoting in further detail from [23] of Patten J’s judgment
in the Yarburgh Trust case, since he there sets out the approach which
the tribunal should take in determining the nature of the activities carried
out by the person who it is claimed is making taxable supplies:
[23] I accept Miss Whipple’s [counsel for the
Commissioners] submission that the motive of the person who makes a supply of
goods or services is not relevant to and more particularly cannot dictate the
correct tax treatment of that transaction. For that reason I would not adopt the
precise reasoning of the tribunal contained in para 54 of its decision. But
the exclusion of motive or purpose in that sense does not require or in my
judgment allow the tribunal to disregard the observable terms and features of
the transaction in question and the wider context in which it came to be
carried out. This is because the transaction if looked at in isolation will
not usually enable the court to decide whether it was carried out in the course
or furtherance of a business which is the test under s 4(1) of the 1994 Act or
to use the language of the Sixth Directive whether it was a supply of services
effected for consideration by a taxable person acting as such, i e by a person
who is carrying out some form of economic activity (see arts 2 and 4(1)). This
test necessitates an inquiry by the tribunal into the wider picture. It will
need to ascertain the nature of the activities carried on by the person alleged
to be in business, the terms upon which and manner in which these activities
(including the transaction in question) were carried out and the nature of the
relationship between the parties to the transaction. This is not intended to
be an exhaustive or particularised list.”
90.
It is made clear later in his judgment that such inquiry into the “wider
picture” should take into account the fact that the activities in question are
charitable activities, even though the charitable purpose or motive of the
activities cannot alter the nature of those activities for VAT purposes (see
[29]). Likewise, the absence of a profit motive does not lead to the
conclusion that the activities are not an economic activity, but it is a factor
to be taken into account when discerning objectively the nature of the
activities in question (see [30]).
91.
This approach was followed in the St Paul’s Community Project Ltd
case. In the course of his judgment reviewing all the authorities Evans-Lombe
J said as to the approach to be taken by the tribunal in determining whether an
activity is or is not a business (at [51]):-
“I accept that the overall policy of the Sixth
Directive requires that the word ‘business’ must be given a very wide meaning
so that it is not confined to profitable enterprises or enterprises intended to
be conducted at a profit at some point. The intention, or apparent intention,
of those conducting the enterprise in question must be disregarded. It is the
intrinsic nature of the enterprise, as established by evidence of what is
actually being performed in order to advance it, that is important in arriving
at a conclusion whether or not a particular undertaking constitutes a
business.”
92.
Mr Jones invited us to disregard both the Yarburgh Trust and the St
Paul’s Community Project Ltd cases on the grounds that in each case the
strict ratio is that the findings of the respective tribunals (that the
activities of the two enterprises – providing nursery and playgroup facilities
with fees set at a level to meet the shortfall in grant and donated income
against operating expenses – were not economic activities) could not be
impugned on Edwards v Bairstow grounds. He went so far as to say that
they were wrongly decided, at least to the extent that they are authority for
the proposition that a person engaged in carrying out a charitable purpose is
not engaged in an economic activity.
93.
We take a different view. First, whilst it is the case that the narrow
point for decision in both cases is whether the tribunal’s findings were
reasonable, in both cases (and especially Yarburgh Trust) there is a
full review and analysis, following extensive argument and reference to
authorities, of the principles derived from both the European and the United
Kingdom cases and the law as it is to be understood in the light of those
principles. We regard the conclusions reached on those matters, which are
expressly stated to be by way of direction to the tribunal as to the nature of
the enquiry it should make, as binding on us. In any event, we see no basis
for questioning those conclusions. In particular, it seems clear to us that
they do not hold that a charitable activity cannot be an economic activity
where a supply is made for a price. They do hold that an activity whereby a
supply is made for a price is not necessarily an economic activity; that it is
necessary to identify in objective terms what the activity is in order to
determine whether it is an economic activity; and that to identify what in
truth that activity is it is necessary to look, not at purpose or results, but
at the entirety of what it is and the context in which it is carried out.
Those propositions, we respectfully consider, are entirely consistent with the
relevant case law.
94.
An approach used in the United Kingdom cases to identify the intrinsic
nature of an enterprise for the purpose of ascertaining whether it amounts to
the carrying on of a business is to apply six criteria which are indicative of
a business, derived from propositions first advanced on behalf of the
Commissioners in Lord Fisher’s case. We agree with Mr Thomas that these
indicia do not comprise a legal test – at best they assist as a tool in the
task of analysing the character of an activity. Lord Slynn in the ICAEW
case summarises the six indicia in these terms (at p 404e):
“...was [the activity] (a) a ‘serious undertaking
earnestly pursued’; (b) pursued with reasonable continuity; (c) substantial in
amount; (d) conducted regularly on sound and recognised business principles;
(e) predominantly concerned with the making of taxable supplies to consumers
for a consideration; and (f) such as consisted of taxable supplies of a kind
commonly made by those who seek to make profit from them.”
95.
Turning to the Appellant’s activities (and having an eye to those six
indicia), in ascertaining the nature of those activities for the purpose of
deciding whether they comprise the carrying on of a business, we have regard to
the following factors and features.
96.
First, the Appellant is indisputably providing services for a
consideration. It provides courses and activities to (mostly) young people,
and it (mostly) charges them for doing so. It has an extensive and reasonably
sophisticated system of pricing which is reviewed annually by the trustee body,
although it is prepared to depart from that by providing discounts greater than
those inherent in the published prices, and in some cases it makes no charges
at all. It therefore must be presumed, unless and until other factors
establish otherwise, that the Appellant is engaged in an economic activity.
97.
The type of activities which the Appellant is engaged upon are provided
by some commercial enterprises, who presumably make profit from them.
98.
The Appellant runs its activities, and manages its financial affairs, in
a professional and “business-like” manner. In its trustee body and full-time
employed chief executive it has an appropriate governance structure. It
prepares budgets and forecasts with the aim of endeavouring to ensure
continuing financial solvency and to provide a framework whereby its financial
position can be monitored and its activities sustained. It has programmes for
seeking grants and for raising donations to support its work, and in matters
such as planning for and funding the construction of the Training Centre it is
looking to continue and develop its activities over the long term. Where it
charges for the courses and activities it contracts with its “customers” on
terms and conditions which a commercial organisation would recognise. Its
turnover (including donated income) is approximately £1 million and its net
assets approximately £2 million (most of which is accounted for by the value of
the site it occupies). In our view its conduct of its activities, and in
particular its financial management, is as one would expect – and almost
certainly as charity regulation would require – of a charity of this size and
nature.
99.
As we have already mentioned, by far the greater part of the Appellant’s
activities are directly carrying out its charitable activities – its principal charitable
objective is to provide “a centre of excellence for the advancement of education
in water, outdoor and indoor activities for young people” and that objective is
achieved by the facilities, courses and activities it provides. For this
reason, as the evidence of Mr Fulbrook made clear, the charges which the
Appellant makes are determined by the trustees each year with a view to a range
of factors balancing the desire to provide those facilities, courses and
activities at the lowest cost possible with the need to maintain financial
prudence for the long-term viability of the Appellant for the benefit of future
generations of young people. The following are the most significant of those
factors: charges are set with a view to their affordability for the young
people the Appellant wishes to benefit; charges are set with a view to covering
operational expenses after taking account of donated income and taking account
also of the contributions of volunteers; discretion is given to permit reducing
or waiving charges in particular cases where pursuit of the charitable objects
is especially desirable; and all capital projects (with the exception of the
Appellant’s original acquisition of the site, which was partly funded by
borrowing) are financed by donations and grants, so that no part of the charges
is directly or indirectly expended on the acquisition or funding of capital
assets.
100. In our view
these are not factors which are indicative of a business, even if certain of
those factors may demonstrate a degree of financial care and prudence aimed at
ensuring that the Appellant can continue to carry out its activities. It is
not consistent with a business activity that charges are set to meet operational
costs to the extent that donated and grant income is not available to meet such
costs; nor is it consistent with a business activity that the necessary capital
costs of the activity are met by donations and grants so that no part of such
costs, or the funding of such costs, is met by those to whom the Appellant
provides its activities. The readiness by the Appellant to reduce or waive
charges, undertaken not with a view to increasing business, but to ensure that
its facilities and activities are made more widely available, is not consistent
with a business activity. All these matters inform as to the true nature of the
activity carried on by the Appellant, not merely its purpose in carrying that
activity.
101. Most
significantly in our view is the issue of volunteers whose time and services
are donated to the Appellant, and who are essential to the way in which the
Appellant carries out its activity. The importance of such volunteers was made
clear by Mr Fulbrook, who spoke as an active and committed volunteer engaged
with the Appellant since its inception. It is clear that the Appellant could
not carry out its activities in the way it operates without the services of the
corps of volunteers available to it. Some indication of their financial
significance was apparent from Miss Foister’s evidence: we have already
indicated that the evidence in relation to this matter was not as clear as it
could perhaps have been, but it was sufficient for us to see that the scale and
effect of volunteer contributions of services is such as to amount to a
significant subsidy to the cost of the Appellant’s operations. As we record at
paragraphs [42] to [47] above, taking into account
the value of donated volunteer services, the true cost of providing a group
kayaking course for a youth group is £114 (against a charge made of £70 or
less) and for an adult group is £124 (against a charge of £100). The nature,
scope and materiality of this feature of the Appellant’s activity indicates, in
our judgment, that the Appellant is engaged in an activity different in kind
from that of a business or economic activity.
102. Taking these
various factors together – in Patten J’s words, “the observable terms and
features” of the Appellant’s activity and “the wider context in which they are
carried out” – we conclude that the intrinsic nature of the Appellant’s
activity or enterprise is not that of a business, even though it is making supplies
for a consideration. The intrinsic nature of its activity is providing courses
and activities in furtherance of its stated charitable objectives, which it
does by raising funds to meet its capital costs, by seeking out, training, and
deploying volunteers who bear a significant burden of staffing those courses
and activities, by raising funds to defray some of its operational costs, and
by making a charge (with a published tariff, but which may be reduced or waived
as the Appellant sees fit in particular circumstances and having regard to its
aims) to cover its remaining actual operational costs.
103. Expressing the
point by reference to the Lord Fisher case indicia, it is the case that
the Appellant’s activity is a serious undertaking earnestly pursued with reasonable
continuity; and that the enterprise is substantial in size and value, and the
supplies it makes (or something similar) are made by commercial enterprises; and
that it adopts and applies prudent financial management. However, there are
features of its activities which are not consistent with sound business
principles (most obviously its use and reliance upon volunteers and its
reliance upon donations to meet part of its operational costs and to meet all
its capital costs); and its predominant concern is not to make taxable supplies
to consumers for a consideration, but to carry out its activities in a manner
which furthers its charitable objectives. The making of supplies for a
consideration is incidental to its predominant concern of furthering its
charitable objectives in that it is one means (admittedly an important one) by
which its predominant concern is achieved.
104. We consider this
to be the case notwithstanding that the Appellant provides some courses and
activities for adults (usually in the form of corporate team motivational
events).
105. In such cases
the charge made exceeds the actual operational cost to the Appellant of
providing the course, although volunteers are engaged in such courses and the
evidence is that, were the Appellant to account for the value contributed by
such volunteers, the true cost would exceed the charges made. In actual cost
terms such courses subsidise the courses provided to young people; in true cost
terms it appears that the Appellant is itself subsidising courses of this
nature provided to adults. We also note that in terms of numbers, for the
period for which information was available, adults attending such courses
accounted for only 1.21% of the total number of persons for whom the Appellant
provided courses or other activities. In the 2010/11 financial statements of
the Appellant such adults accounted for just under 10% of income derived from
charges. Those two relative percentages indicate the extent to which (even
disregarding the value of volunteers) the overwhelming majority of persons are
subsidised by the Appellant.
106. There is a case
to be argued that this aspect of the Appellant’s activities has more of the
characteristics of an economic activity. The Appellant argues that such
activities are part of its wider remit of seeking potential volunteers. Our
conclusion is that this aspect of the Appellant’s activities does not change
the essential nature of the Appellant’s activities when those activities are
viewed as a whole. In part this is because of scale – depending on the basis
of measurement (headcount or income) it is between 1.5% and 10% of the
Appellant’s overall activities. It is also because the Appellant delivers its
courses and activities to these adults in the same way (using volunteers; using
capital assets and facilities funded by donations; and, taking account of true
cost, at a subsidy) as it delivers courses and activities to its other
“customers”. The only points of difference are its purpose, and the level of
charges it makes, neither of which is a determining factor, and which, when
taken into account in the wider enquiry which has to be made, do not change the
essence of the Appellant’s activities and the way in which it carries them out.
107. As we have
noted, the Commissioners place some reliance upon Articles 132 and 133, which
exempt from VAT certain supplies by way of activities in the public interest
(including those related to physical education and sport where the supplies are
by non-profit-making organisations), and permit Member States to restrict that
exemption to cases which meet one or more specified conditions, such as the
case where there is no aim to make a profit, or where prices are charged at
levels below those charged by commercial enterprises. The Commissioners’ case
is that if such activities were not inherently economic activities for the
purposes of the Directive (and hence otherwise taxable supplies), there would
be no reason for conferring an exemption in such cases.
108. This argument
appears to have been put forward by the Commissioners in the Yarburgh Trust
case, but does not appear to have commended itself to the judge, who reaches
his decision without reference to it. It was also raised in the Riverside
Housing case, where Lawrence Collins J notes (at [85]) that
it is implicit from these Directive provisions that the supplies in question
may be economic activities.
109. Mr Thomas
referred us to two Court of Justice decisions relating to the corresponding
provisions in the earlier (Sixth) Directive, Kennemer Golf & Country Club
v Staatssecretaris van Financiën (Case C-174/00) [2002] STC 502 and Kingscrest
Associates Ltd and another v Customs and Excise Commissioners(Case
C-498/03) [2005] STC 1547. He pointed out that neither of those cases, nor the
directly relevant French Republic case, had been cited in
the Riverside Housing case. He submitted that the Kennemer and Kingscrest
Associates cases show that the exemption provisions in question in the
Directive are directed at the narrow question of whether the enterprise making
the supplies has the aim of making a profit for distribution to its members,
not at the nature of the activity. On this basis the exemption provisions tell
us nothing as to whether certain activities are in their nature economic
activities. Mr Jones argues (seeking support from remarks in the Advocate
General’s opinion in the Kennemer case) that the exemptions apply to
non-commercial enterprises carrying out specified activities, with the clear
implication that such persons carrying out those activities are carrying out
economic activities.
110. On the facts
this may not be a relevant issue, in that the Commissioners were not able to
confirm that the supplies made by the Appellant would be regarded as falling
within the exemptions provided for by these Articles (in the form of their
United Kingdom enactment) – we understand that that remains an open issue. But
in any event we are of the view that the Commissioners cannot place too much
reliance on the point. A non-profit-making organisation may be engaged in an
activity which by its intrinsic nature is an economic activity, so that the
exemption is relevant; but if the activity is not intrinsically an economic
activity when its nature is examined in the wider context, then the existence
of the exemption is irrelevant. The profit-making or otherwise characteristic
of the organisation, or the fact that it charges at less than a commercial rate
for the supplies it makes, may have some bearing on whether the activity it
undertakes is an economic activity, but those factors do not in themselves
determine the question. The enquiry as to whether a person is carrying on an
economic activity has to be made, and a conclusion reached, without regard to
the scope of possible exemptions. If the activity is an economic activity, so
that supplies in carrying out that activity are taxable, then it is relevant to
examine the scope of possible exemptions.
111. We are not
therefore persuaded that Articles 132 and 133 are relevant to the question we
have to decide, and for the reasons we have given we conclude that the
Appellant is not engaged in carrying on a business or in an economic activity.
112. We now have to
consider the intended use of the Training Centre. Having concluded that the
Appellant is not, in providing courses and its facilities, engaged in an
economic activity, the question is whether it intended using the Training
Centre for such courses and related activities (in which case it will have the
intention of using the Training Centre solely for a relevant charitable purpose).
If it intended using the Training Centre for some unrelated activity, the issue
is whether that unrelated activity is a business (if so, the Appellant’s claim
fails).
113. The first
factual point to note is that the Training Centre is, in terms of its use at
least, two distinct buildings. As Mr Fulbrook described it, the need was for
modern changing, shower and toilet facilities (now the lower floor) – the site
already had adequate buildings for indoor training purposes, but in part to
meet the requirements of the planning authority, and in part to have an asset
which was a more attractive proposition to put to potential donors and
grant-making bodies, the building was designed to house an indoor training
facility on the upper floor.
114. In these
circumstances, in determining use, or intended use at the time of the building
contract, it is necessary to have regard to the separate parts – lower and
upper floor – of the Training Centre. The apportionment provisions of Note
(10) of Group 5 of Schedule 8 to VATA1994 allow for such an approach.
115. We can deal with
the lower floor of the Training Centre shortly. The Appellant’s intention was
to provide the facilities it houses in the lower floor principally for use by
young people attending its courses. It also intended to provide limited toilet
facilities for adults attending its courses (although such use soon became
impractical). It is clear therefore that the Appellant intended to use the
lower floor in the course and for the purpose of its activity which we have concluded
was not the carrying on of a business. We cannot see that there is any case
that there is a distinct use of the lower floor separate from the Appellant’s
general activity.
116. We therefore
conclude that the lower floor of the Training Centre is a building intended for
use solely for a relevant charitable purpose within the terms of Items 2 and 4
of Group 5 of Schedule 8 to VATA 1994.
117. The position
with regard to the upper floor of the Training Centre is more complex.
118. We had detailed
evidence as to actual use of the upper floor for the period from mid October
2010 to the end of June 2012, and our findings are set out in paragraphs [52]
to [54] above. On a headcount basis more than 95% of the use
of the upper floor was by persons (young people, family groups, volunteers,
adults whose activities were subsidised) who were attending courses or
otherwise taking part in the activities provided by the Appellant – that is,
use which is in the course and for the purpose of the Appellant’s activity
which we have concluded was not the carrying on of a business. On a charges
basis the percentage for such “core” use falls to 85%. We consider, however,
that the headcount basis provides a better method of determining the
proportions of different usage in circumstances where in a substantial number
of cases no charge was made to users of the upper floor. (These figures assume
that the three occasions of corporate use were unrelated to courses provided by
the Appellant, although it appears that on two of those occasions the use made
of the upper floor was connected with courses attended by the corporate team
members – such use would fall within the “non-business” activity of the
Appellant, as we have found that to be.)
119. We conclude
that, on an actual use basis, and having regard to the de minimis rule,
the upper floor has been used solely for a relevant charitable purpose within
the relevant VAT provisions. We are, however, required to look at intended,
rather than actual, use. On the issue of intention we had three matters of
evidence: the witness evidence of Mr Fulbrook as to the plans and intentions of
himself and his fellow trustees; the terms of the planning consent given for
the Training Centre; and entries on the Appellant’s website both before and
after the Training Centre was constructed.
120. Mr Fulbrook was
clear that the trustees of the Appellant intended that the upper floor should
be used to provide indoor space which could be used for those course activities
(“classroom” training, de-briefing, first aid training, etc) which benefited
from such a facility. The intention was to replace (as indeed the planning
authority required) existing indoor training space. This is consistent with
the conditions on which planning consent was granted, which were quite specific
in restricting use to the Appellant’s principal activities (see paragraph [33]
above).
121. The Appellant’s
website before the Training Centre was constructed referred to the Appellant’s
ability to host product launch events, and after construction, and following a
successful letting of the upper floor for a corporate reception, the facilities
of the upper floor were advertised on the website (see paragraph [32]
above). It is not clear whether the earlier website page was posted with the
upper floor in mind, and since it refers to corporate events held in
conjunction with nearby hotels it is also unclear as to quite what facilities
of its own the Appellant was promoting by this means.
122. We prefer to
rely on the evidence of Mr Fulbrook and of the planning consent, taking account
also of the usage which actually occurred as some indication of what was a
realistic expectation of how the upper floor could be used. We note also that
when construction began the contract did not extend to installing a heating
system or internal walls (the latter have since been constructed, but there is
as yet no heating in the upper floor), so that it could not reasonably have
been thought at that time that the premises would provide a very attractive
corporate events venue.
123. We therefore
conclude that it was intended that the upper floor should be used by the
Appellant in the course and for the purpose of its activity which we have
concluded was not the carrying on of a business. Therefore the upper floor of
the Training Centre also is a building intended for use solely for a relevant
charitable purpose within the terms of Items 2 and 4 of Group 5 of Schedule 8
to VATA 1994.
124. For these
reasons we allow the Appellant’s appeal.
Right to apply for permission to appeal
125. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
EDWARD SADLER
TRIBUNAL JUDGE
RELEASE DATE: 28 February 2013
Authorities referred to in
skeletons and not referred to in the decision:
Lennartz v Finanzamt München
III (Case C-97/90) [1995] STC 514
BLP Group plc v Customs and Excise
Commissioners (Case C-4/94) [1995] STC 424
Apple and Pear Development
Council v Customs and Excise Commissioners (Case C -101/86) [1988] STC 221
Edward Harrison v HMRC
First-Tier Tribunal TC 1205
