Meaning of ‘business’–zero-rating and charity buildings

This appeal related to the construction of a new building for Wakefield College and HMRC’s refusal to authorise Wakefield to issue a zero-rating certificate to the builders. The College could only do this if the building was used solely for a “relevant charitable purpose (‘RCP’)” i.e. not in the course of a business. HMRC contended that some of the college’s supplies of education did constitute business supplies so that the building was not used solely for a RCP. HMRC accepts that where the business activity is less than 5% of the activities as a whole, zero rating can still apply.
It was accepted that the College was a charity and that following the construction of the building, the college intended to make use of it for the provision of further and higher education and this was capable of amounting to a RCP. Most of the College’s income derived from government funding. HMRC contended, however, that some of the College’s supplies of education were made in the course or furtherance of a business, because the students paid fees so that the building was not used solely for a RCP.
The College argued that some of its activities were non-business in respect of UK students who did not pay the full amount of the tuition fee. It cited the case of EC v Finland, where it was held that activities funded by fees payable according to individuals’ characteristics, in particular their financial position and inability to pay were not business. The UT however held that the FTT had erred in applying non-business treatment to the fees paid by students over 19 who are not otherwise entitled to remission of tuition fees and are not overseas students- these students did not pay less because of any individual characteristic. The UT therefore decided that the College was in business and because the quantum of these fees exceeded the 5% limit, the construction works were standard rated.
Why it matters
This has been a protracted case with three previous hearings so far, and it was clear that the UT was not altogether happy with the result. Significantly, the UT commented that it was “capricious” and not what Parliament intended, that a charity deriving the bulk of its income from public funds could be denied the VAT relief intended for charitable buildings because it is forced by shortfalls in the funding to obtain additional income from other sources. The UT suggested that it should be possible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse. It remains to be seen whether these comments might provoke some review of the operation of the relief.