This Upper Tribunal (UT) case reviewed the VAT position of a building intended for use solely for educating young people and if the building of a training centre was zero-rated. The UT also considered whether the charity was carrying on an economic activity.

Key facts and relevant legislation

The case consisted of an appeal by HMRC against the decision of the First-tier Tribunal (FTT) which held that construction services supplied to the Longridge, a registered charity, should be zero-rated for VAT purposes because those construction services related to supplies for a building that was intended for use solely for relevant charitable purposes. The VAT in issue was about £135,000.

The site is on the banks of the River Thames and there are areas for other purposes such as campsites, a games field and buildings for storing craft and equipment for the various water-based activities provided by the charity. There is also a building which provides overnight accommodation for young people’s groups visiting the site and taking courses provided by the Longridge in addition to a youth club, reception area and cafe.

The VAT at the centre of this dispute was incurred on the construction of a training centre at the site. The training centre includes toilets, shower rooms and changing rooms on the ground floor and meeting room facilities on the upper floor. The cost of building the training centre was, the FTT found, entirely met by donations and grants rather than out of charges to customers.

The FTT described the activities carried on at Longridge as including a wide range of day and residential courses and activities principally, but not exclusively, based on water-borne activities, for a wide range of customers. Corporate use takes place when the facilities are not being used by young people or families. In addition, on occasion during the summer, special day events would be organised.

For all courses and most activities Longridge provides an appropriately qualified instructor (either a paid employee or contractor, or a volunteer). Courses are accredited by a range of organisations. 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.

The relevant legislation is section 30 of the VAT Act 1994 (‘VATA’) which provides for certain supplies by a taxable person to be taxable at the zero rate. Schedule 8 to the VATA specifies the relevant supplies and Group 5 of Schedule 8, headed ‘Construction of Buildings’ is the relevant supply here. Items 2 and 4 of Group 5 are:

“2 The supply in the course of the construction of –

1. a building ... intended for use solely for ... a relevant charitable purpose; or
2. ..... 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.”

Note (6) to Group 5 is relevant to the present appeal:

“(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;”

Thus the construction supplies in this case will be zero rated if the training centre at Longridge is a building used solely for a charitable purpose otherwise than in the course or furtherance of a business.

It is common ground that when determining whether the use of a building is ‘in the course or furtherance of a business’ for the purpose of Note (6), the test to be applied is the same test as applies to determine whether an activity is an economic activity for the purpose of deciding whether a person is a taxable person for VAT purposes. That test is currently set out in Article 9 of the Principal VAT Directive which provides in paragraph 9(1):

“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”

Article 9 is implemented within the United Kingdom by section 4 of VATA:

“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.”

Decision

The FTT addressed the question whether in carrying out its activities; Longridge was carrying on a business. The FTT found that by far the greater part of Longridge’s activities are ‘directly by way of carrying out its charitable objectives’ and a limited part was ‘seemingly for the purpose of raising funds’ to subsidise the charitable activities. The FTT stated that 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.

Counsel for HMRC gave 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. HMRC argued that 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.

The FTT referred to several relevant decisions drawing the following conclusion from those decisions:

“… 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.”

The FTT also referred to the six criteria formulated by the United Kingdom courts for determining whether an enterprise amounts to the carrying on of a business. These were:

“... was [the activity]

1. a ‘serious undertaking earnestly pursued’;
2. pursued with reasonable continuity;
3. substantial in amount;
4. conducted regularly on sound and recognised business principles;
5. predominantly concerned with the making of taxable supplies to consumers for a consideration; and
6. such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them.”

Since Longridge was providing services for a consideration, ‘it therefore must be presumed, unless and until other factors establish otherwise’ that Longridge is engaged in an economic activity.

Considering the charges set by Longridge and the contribution those charges made to meet the costs of providing the services offered, the FTT found that:

1. Longridge publishes an extensive price list each year. The prices are set by the trustees having regard to the need to make sure that the activities are affordable for young people and their families, balanced against the need to cover operational costs after taking account of donated income and volunteers.
2. All capital projects are paid for out of donated income and not out of charges made for activities and courses.
3. There is typically a three-tier pricing structure with the lowest price for youth groups, a mid price for families and a higher price for adult groups including corporate events.
4. In the case of youth groups, Longridge may offer discounts or waive the fee entirely, particularly in the case of groups of young people with disabilities or other special needs.
5. In the period 1 January 2012 to 25 November 2012, 94.5% of those using the Longridge facilities were young people. Of the 1,438 adults comprising the remaining 5.5% the vast majority were adults whose use was subsidised. 327 adults paid a charge without discount.

Overall an analysis of Longridge’s financial statements for the years 2010/11 showed that total income from all its subsidised activities was less than the cost of providing those activities. That analysis also showed that the total income from activities provided to all other adults (including those participating as a “corporate team”) was slightly higher than the cost of providing those activities.

The FTT concluded that ‘these are not factors which are indicative of a business’. The other factor considered significant by the FTT was that time and services were donated to Longridge by volunteers who were essential to the way in which Longridge carries out its activities. The FTT emphasised the financial significance of the corps of volunteers noting that it amounts to a significant subsidy to the cost of Longridge’s operations.

The FTT then concluded, taking these various factors together, that the observable terms and features of Longridge’s activity and “the wider context in which they are carried out” 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 Longridge sees fit in particular circumstances and having regard to its aims) to cover its remaining actual operational costs.

The FTT considered that some of the indicia referred to in the Lord Fisher case were met but that the activity was 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”. The FTT considered the small proportion of the adults whose participation was not subsidised by Longridge, comprising 1.25% of the total number of participants and just under 10% of the income. The FTT held that this did not change the essence of Longridge’s activities and the way in which it carries them out.

The UT found that the FTT applied the correct test in evaluating the facts as it found them and there were no grounds for disturbing its conclusion that Longridge does not carry on an economic activity at the site. The Appeal was upheld.

The full judgement of the case is available from http://www.tribunals.gov.uk/