The High Court upheld the decision of the VAT tribunal ([2006] BVC 2,314) that the cost of constructing a regional head office for a housing association which was a charity was not zero-rated for VAT purposes because the building was not used for a relevant charitable purpose because its use was not otherwise than in the course or furtherance of a business’ for the purposes of the Value Added Tax Act 1994, Sch. 8, Grp. 5, item 2(a) and note 6.

Facts

The taxpayer was a registered social landlord and a charity. Its principal activity was the provision of social housing to those in need and it owned or managed more than 22,000 properties. The taxpayer's income was derived mainly from rents paid by tenants and grants paid by the Housing Corporation. Any surplus was re-invested in its activities and surpluses were not distributed.

As a social landlord the taxpayer was governed by an extensive regulatory framework and dependent on public funds.

Customs refused zero rating of the construction costs on the basis that the taxpayer would be occupying the new building in the course or furtherance of a business since ‘business’ had a wide meaning, reflecting the term ‘economic activity’ used in Council Directive 77/388 (‘the sixth directive’).

The VAT tribunal concluded, inter alia, that the letting of property in return for payment was an economic activity whether or not it was pursued for social or philanthropic reasons and that the taxpayer was engaged in ‘business’ within VATA 1994, s. 4. Accordingly, the construction of the building did not qualify for zero-rating under item 2(a) of Grp. 5 ([2006] BVC 2,314; Decision No. 19,341). The taxpayer appealed to the High Court.

Issue

Whether the construction of the new headquarters building qualified for zero-rating under Sch. 8, Grp. 5, item 2 to VATA 1994 because its use would be otherwise than in the course or furtherance of a business in accordance with Note (6)(a) to Grp. 5.

Decision

Lawrence Collins J (dismissing the appeal) said that, it was common ground that, since VATA 1994 had to be construed to conform to the sixth directive, the term business’ in VATA 1994, s. 4 had to be construed, so far as possible, to mean ‘economic activity’ which was the term used in art. 4 of the sixth directive.

Although there were cases on either side of the line, on the evidence and in the light of the trend of earlier decisions, the tribunal had been entitled to come to its well-reasoned decision that the activities of the taxpayer were in the course or furtherance of a business (Ayuntamiento de Sevilla v Recaudadores de las Zonas primera y segunda (Case C-202/90) [1993] BTC 5,186; [1991] ECR I-4247, Cardiff Community Housing Association Ltd [2001] BVC 2,112, C & E Commrs v Fisher (1981) 1 BVC 392; C & E Commrs v St Paul's Community Project Ltd [2004] BTC 5,803, C & E Commrs v Yarburgh Children's Trust [2001] BTC 5,651 and Institute of Chartered Accountants in England and Wales v C & E Commrs [1999] BTC 5,165 considered).

Business’ was a word of wide meaning, and the absence of one common attribute of ordinary businesses, trades, professions or vocations, such as the pursuit of profit, did not necessarily mean that the activity was not a business or trade etc. Indicia as to whether an activity was a business included whether it was pursued with reasonable continuity, substantial in amount, conducted regularly on sound and 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 sought to make a profit from them. Parliament had entrusted to tribunals the task of examining the evidence and of determining the facts, and the tribunals would be able to detect a commercial enterprise or business which might be dressed up as no more than an activity of pleasure or social enjoyment (C & E Commrs v Fisher 1981) 1 BVC 392 and Morrison's Academy Boarding Houses Association v C & E Commrs (1977) 1 BVC 108 applied).

The whole of the taxpayer's very substantial activity was concerned with letting the properties on assured tenancies to residential occupiers, selling properties to tenants in accordance with ‘right to buy’ provisions, and selling properties which were surplus to requirements. Its income was derived principally from rents received from tenants. It accepted that its sales of properties were in the course or furtherance of business or economic activity. The tribunal was entitled to take into account the fact that the taxpayer's finance director had referred to the taxpayer's ‘business’ and the word ‘business’ was also used in the Housing Corporation's publications to describe the activities of registered social landlords. Moreover the tribunal was entitled to find that the following matters were not sufficient to displace the finding that the lettings were not otherwise than in the course or furtherance of a business: the taxpayer did not set out to (and indeed could not) maximise its profits, did not distribute such profits as it earned, but re-invested them; much of the rent paid by tenants was derived from housing benefit received by them; a substantial part of its capital resources came from grants paid by the Housing Corporation; surpluses were not distributed, but were re-invested; housing associations were subject to an extensive regulatory framework, and there were upper limits on the rents which they might charge, which were generally significantly below the notional market rent for the properties.

Furthermore, the tribunal's decision was supported by art. 13 of the sixth directive, which contained a list of different kinds of supply which member states had to, or might, exempt from VAT. It was implicit from the reference in art. 13(A)(1)(g) to ‘the supply of services closely linked to welfare and social security work by bodies governed by public law or by other organizations recognised as charitable by the member state concerned’ that such supplies might be economic activities; and from the fact that art. 13(A)(2)(a) permitted member states to restrict the exemption to bodies which did ‘not systematically aim to make a profit’ and which ‘charged prices approved by public authorities or which do not exceed such approved prices’ that a body which satisfied those conditions could be making supplies in the course of a business (EC Commission v Netherlands (Case 235/85) [1987] ECR 1471 considered).

Quite apart from the fact that VATA 1994, s. 33 did not apply to the taxpayer because it was not within any of the listed categories eligible for a VAT refund as public bodies, art. 4(5) of the sixth directive did not assist the taxpayer, either directly or by way of analogy. It provided an exemption only for bodies governed by public law and even then only for the activities or transactions in which they were engaged as public authorities (EC Commission v Netherlands; Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d'Arda v Comune di Carpaneto Piacentino (Cases 231/87 and 129/88) [1991] BTC 5,072; [1989] ECR 3233 and Ayuntamiento de Sevilla v Recaudadores de las Zonas primera y segunda referred to).

Chancery Division.

Judgment delivered 3 October 2006.