VAT – Reduced VAT for Electricity Supplies

Introduction

The High Court case deals with VAT and charities. The key question was whether Cambridge University was entitled to a reduced rate of VAT of 5% for its electricity, which was available to charities using the electricity for non-business purposes, even though its provision of higher education was a business activity.

The Facts

The University was incorporated by Statute in 1571. It was regulated by the Universities of Oxford and Cambridge Act 1923 and the secondary and tertiary legislation made thereunder. That legislation provided a complete code for the powers, governance and administration of the University.

The funding of the University was derived from a number of sources, including the Cambridge University Press, public examination and assessment services, research grants and contracts, endowment and investment income, student fees and government funding almost entirely through Higher Education Funding Council for England (HEFCE).

In November 2004, the University went into occupation of a building it had newly constructed for the purposes of its faculty of education. The building was used by the University both for the provision of education at undergraduate and graduate level and for purposes of research. The University applied to HMRC for the necessary consent to entitle it to issue a certificate to the supplier of electricity to the building requiring the supplier to charge VAT in respect of those supplies at the reduced rate of 5%. Provisions allow payment of the reduced rate of 5% in respect of supplies of electricity for: “use by a charity otherwise than in the course or furtherance of a business”. The University was a charity but, as it admitted, its provision of higher education was a business activity.

The VAT Tribunal found against the University, i.e. the University was not a body governed by public law and even if it was, it did not engage as a public authority in providing higher education.

The University appealed the Tribunal's decision.

The Issue

Whether the University was entitled to the reduced rate of VAT of 5% in respect of supplies of electricity for “use by a charity otherwise than in the course or furtherance of a business”.

The Decision

The High Court dismissed the University's appeal.

University's Argument

The case for the University involves three propositions, namely:

1. the University was a body governed by public law;
2. the University engaged in its activities or transactions as a public authority;
3. the proper application of Article 13 of the VAT Directive required that the engagement of the University in those activities and transactions was to be treated for VAT purposes as not carrying on an economic activity.

These contentions were rejected by HMRC.

However, it was common ground that if Article 13 did apply in the manner for which the University contended then the use of electricity by the University in its new building was not “in the course or furtherance of a business”. Hence the reduced rate of VAT would apply.

Was the University a Body Governed by Public Law for the Purposes of Article 13?

The principle of fiscal neutrality precludes economic operators carrying out the same or similar transactions from being treated differently for the purposes of VAT. It was designed to eliminate the distortion which would arise if supplies of goods or services in competition with each other were treated unequally for the purposes of VAT. In the Judge's opinion, the Tribunal was right in testing the submissions of counsel for the University by reference to the principle of fiscal neutrality.

A number of ECJ decisions were reviewed. It was the view of the University that was for the national court to determine what criteria were required by “a body governed by public law”. The Judge disagreed with this. In accordance with the law of the UK, the University submitted that it was such a body because it was a creature of statute, its powers or duties were derived from legislation primary or secondary. Those features distinguished it from private traders. Accordingly it was by its very nature a public body governed by public law. The Judge rejected this argument as not all universities met these conditions. ECJ cases established that “a body governed by public law” must, as a matter of Community law, be identified as part of the public administration of the relevant Member State. Whether or not any particular institution could be so identified was a matter for the national court. The Tribunal considered that the University could not be so identified. In the High Court judgment, it was held that they were right for the reasons they gave.

On the basis of the above, the Judge held that the Tribunal was right in point of law to have concluded that the University was not a body governed by public law. Consequently Article 13 could not have the effect of deeming the activities of the University for which the electricity was to be supplied to be undertaken otherwise than in the course of furtherance of a business.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/434.html.