In VAT there have been many disagreements over what constitutes a “business”. This is crucial because it determines whether an activity is liable to VAT; and for charities it determines whether they can have relief from VAT on construction of new buldings. EU law refers to “economic activity” rather than business, and as UK domestic law must conform to EU law (at least for the time being), both terms must be seen as having the same meaning.The Court of Appeal (‘CA’) has recently agreed with HMRC that Longridge on the Thames was undertaking economic activities, and therefore was unable to benefit from the zero rate relief available for its new building. In doing so the CA has cast doubt on some of the tests previously used in the UK to determine “business” status.
Background and facts
Longridge provides a range of residential courses and water-borne activities. Fees are charged but set so as to be affordable to young people and their families and to cover operational costs. The fees are adjusted depending on the ability of the customers to pay and a substantial number of volunteers contribute their time to Longridge’s activities for no charge.
The dispute concerned whether the construction of Longridge’s new training centre could be zero rated. Charities constructing new buildings can benefit from zero-rating if the new building is used solely for a RCP i.e used otherwise than in the course or furtherance of a business. In deciding the whether Longridge was in business the FTT applied the so called ‘Fisher tests’ (set out in para 4.1 of HMRC Notice 701/1) and concluded that ‘the intrinsic nature of the appellant’s activity is not of a business, even though it is making supplies for a consideration’. The key test for Longridge was whether it was ‘predominantly concerned ’ with making supplies in return for payment. In the UT HMRC argued that the FTT was wrong to focus on the fact that the fees did not cover costs and the use of volunteers – a non-profit making activity can still be an economic activity. However the UT upheld the reasoning of the FTT commenting that it was necessary to examine the ‘observable terms and features’ of the activities carried out, as the FTT had and that Longridges predominant concern was it charitable aim of making sporting facilities affordable .
The CA focused on the interpretation of art 9(1) Principal VAT Directive which defines a taxable person as ‘any person who independently carries out in any place an economic activity whatever the purpose or result of that activity’. The UK VAT Act refers to ‘a taxable supply made by a taxable person in the course or furtherance of any business carried on by him’. Both sides accepted that economic activity and business activity were the same thing.
The CA agreed with HMRC that there were inconsistencies between the UK and ECJ case law. It focused on applying EU principles to the present case, and started from the general rule, followed in the Commission v Finland case, that an activity will be an economic activity where it is “permanent and is carried out in return for remuneration which is received by the person carrying out the activity“.
The CA stated that the Fisher tests relied on by the UK courts might have a role to play, but they cannot displace the approach required by ECJ case law. There is no special rule for charities and the absence of a profit is irrelevant. The use of volunteers and Longridge’s charitable objects were not enough to convert what would otherwise be an economic activity into something else. Instead, what needs to be considered is whether there a direct link between the payment and the service provided, which in this case there was.
Implications for charities
This is an important judgement for charities because it brings into question the line of reasoning which has long held in the earlier decisions of UK courts. It is particularly bad news for charities seeking to meet the RCP test for new buildings. It remains to be seen whether the charity will appeal, but if not HMRC may then seek to argue that any level of payment, however small and non-commercial, will mean that charities cannot benefit from relief from VAT on construction. Charities which are carrying on activities where payments are received may need to review their VAT position in the light of this decision. Provided that the service is taxable, and the consideration is not just ‘nominal’ or ‘symbolic’, then a liability to register might arise. That may or may not be a benefit; making some taxable supplies would allow VAT to be deducted on associated costs but would require VAT to be paid to HMRC on income. The judgment might also provide the opportunity for improved VAT recovery on expenditure where a charity is able to charge for its services rather than provide them for free.