The Wakefield College case and ‘non-business’ for VAT

The Court of appeal has released its judgment in the case of Wakefield College v HMRC [2018] EWCA Civ 952.

This case has implications for all charities because it is about the VAT relief (a zero rate) applicable to the construction of new buildings for charities. The relief applies where a building is used for non-business purposes – “relevant charitable purpose”. Where any business use would be exempt, (for example education provided by charities), the charity will prefer its activities to be regarded as non-business so that it is not charged VAT which it cannot claim.

The Court of Appeal decision in Longridge on the Thames [2016] EWCA Civ 930, in September 2016 appeared to establish that there is limited scope for ‘non-business’ charitable activity for the purposes of the ‘relevant charitable purpose’ test.  Longbridge claimed the key test was whether the charity’s ‘predominant concern’ was the making of supplies for a consideration. It argued that its policy of subsidised pricing and use of volunteers showed that it was predominantly concerned with providing access to sporting activity and not with ‘making supplies for a consideration’. But Longridge lost in the Court of Appeal – the court thought that neither predominant concern nor the quantum of the charges were relevant. At that time, however, the Wakefield case was still running.

In Wakefield HMRC denied VAT relief for the new college building on the basis that more than 5% of the use would be ‘business’.  The issue was whether the provision of further education courses to students living locally who paid a fixed, but publicly subsidised fee, amounted to the carrying on of a business activity.

The College argued the subsidised courses were not “business” based on the CJEU decision of Finland, in which it was decided that means-tested payments, made by a minority of service users for legal advice, was not consideration because it relied on determining the means of the payer not the value of the service, and that was not a clear enough ‘link’ for the payment to be made ‘for’ the services.  This line of argument was later followed in the CJEU in Gemeente Borsele, where a municipal body charged parents for school transport, but only those travelling over a certain distance, and only to the extent families could pay, meaning it received only 3% of the actual cost of the service. The College argued that it, too, only charged a small percentage, and had kept fees low because of the economic circumstances of the local residents. It thus argued that despite charges being fixed for all qualifying applicants, this was a form of means testing, as in Finland and Gemeente Borsele, and it was therefore not receiving ‘consideration’ for these courses and thus not in ‘business’ to that extent.


The Court of Appeal found that the College was carrying on an economic activity and thus zero rating could not apply. Briefly this was because its activities were not comparable to those in Finland and Bosele. Its sole activity is the provision of educational courses, whereas the transport in Borsele and the legal services in Finland were very much ancillary to their principal activities as public bodies. The provision of courses to students paying subsidised fees was a significant, albeit minority, part of the College’s total operations and the fees paid by such students were significant in amount, both in value and in relation to the cost of providing the relevant courses. Furthermore, the fees paid by the students were calculated by reference to the cost of providing the courses, and not to the means of the individual students.

Why it matters

HMRC suggested that about 50 other cases, involving approximately £120m of VAT, would be affected by this decision. The Court made some interesting comments, derived from reading the French version of the Finland and Borsele cases, and said whether there is a supply for consideration and whether that supply constitutes an economic activity are two separate questions. A supply ‘for consideration’ is  necessary, but is not sufficient in itself for an actvity to be an ‘economic activity’. The first condition requires  the payment to be made under a legal relationship with reciprocal performance between the supplier and the recipient, i.e. the ‘direct link’. The economic activity condition means also showing that the supply is made ‘for the purpose of ‘obtaining an income. But ultimately the Court decided that here the “direct link” test was met anyway, because the fees were not means-tested.

Thus it seems likely that the position after Longridge remains, i.e. that the only use that is not to be regarded as ‘business’ is in cases where there is no ‘remuneration’ (for which read payment or ‘consideration’). Unfortunately HMRC may now be likely to argue that, even in very small operations where below-cost payment is received, (such as in the cases of St Pauls and Yarborough nurseries) construction services may not qualify for relief.



The VAT problem with pubs

Two recent cases, Languard New Homes Ltd and MacPherson illustrate the continuing VAT issues with non-residential conversions, particularly problems with conversion of pubs and shops.

Normally if a developer carries out work on an existing flat or house and sells a long lease in it afterwards, he will incur VAT of 20% on the works and the sale of the lease will be exempt. The exemption means that the developer can’t claim the VAT on the works and related costs.  This additional VAT cost increases the cost of residential conversions, particularly in comparison with new builds where the construction services and sales are normally zero-rated.

However, the sale of a newly converted non-residential property which creates additional dwellings can be zero rated, which is important, because it means that the developer can claim VAT on contractors’ fees and related costs.

The problem lies with the legislation on conversions, which states that this only applies to conversion of non-residential buildings or non-residential parts of buildings. If there is any part of the building which was residential before, the conversion of a non-residential part does not allow you to zero rate the sale of the final dwelling unless the result of that conversion was to create an additional dwelling or dwellings.

This causes a big headache for pub and shop conversations, where often there was some associated residential accommodation for the landlord or staff. Often this accommodation is on upper storeys with the commercial below, but on conversion the building may be divided into new residential units vertically, not horizontally, meaning that the new dwellings all incorporate a part that used to be commercial and a part that was always residential.

This is what happened in the cases of Languard and MacPherson. The Upper Tribunal has decided that none of the dwellings in either case had been created by converting part of a building that had not been previously designed for use as a dwelling, because they had been created from an amalgamation of the non-residential parts and the residential parts. Consequently, nether company has succeeded so far in obtaining zero -rating and thus recovery of input tax.

Why it matters:These are disappointing decisions because the point of this legislation was to encourage the redevelopment of existing commercial properties into dwellings, to address housing shortages and use “brownfield” sites. It is hoped that the Office of Tax Simplification will look at this as part of its current review of VAT,  as the complexity of the rules and HMRC’s enforcment of them appears to be thwarting that policy intention.

Developers and builders need to understand the rules about conversions to maximise VAT recovery and avoid errors. If you would like to discuss this case or similar developments give us a call.

EU Judgment: Member States can decide which supplies of cultural services may be exempt from VAT

On 15 February 2017, the Court of Justice of the European Union (CJEU) released its decision in the British Film Institute’s (BFI) UK VAT case concerning HMRC’s decision to refuse BFI’s claim for overpaid VAT in the period 1990 to 1996 on the sale of tickets for admission to screenings of films.

The First-Tier Tribunal had held that admission to a cinema or other venue showing films by a non-profit making body and registered charity, was a cultural service for the purpose of Article 13A(1)(n) of the Sixth Directive, now Article 132(1)(n) of the VAT Directive (Directive) and that in the absence of domestic implementing legislation during the claim period, the EU provisions had direct effect. Thus in its view BFI’s film admission income was exempt from VAT.

The Upper Tribunal upheld this decision and HMRC appealed to the Court of Appeal. The Court of Appeal referred the case to the CJEU asking whether the cultural services exemption has direct effect, so as to
exempt BFI’s supplies in the absence of any domestic implementing legislation. The referral also asked whether any discretion is given to Member States to discriminate between cultural services in their application of the exemption.

The CJEU, agreeing with the Advocate General (AG), found that where the subject matter of the provisions of an EU directive appear to be unconditional and sufficiently precise, they may be relied upon before the national courts by individuals where the Member State has failed to implement the directive in domestic law within the period prescribed or where it has failed to implement the directive correctly. However, in the current case the exemption laid down in the Directive refers only to ‘certain cultural services’ and the Directive does not specify which cultural services the Member States are required to exempt. The CJEU held that as Member States have discretion in the application of the exemption for cultural services, the Directive cannot be relied on directly by a taxable person. That meant HMRC’s interpretation of the EU provision applied.

Why it matters: This judgment is disappointing for those hoping to widen the narrow interpretation the UK placed on the exemption- for example those operating botanical gardens and holding events that may be cultural but are not theatrical, choreographic, or musical. It confirms that HMRC does have discretion to allow exemption for some cultural services whilst taxing others. Post Brexit however, there could be an opportunity for those in the cultural charity sector to lobby for an amendment to the UK legislation.

C-592/15 British Film Institute

Services closely related to education – exemption

The Advocate General’s opinion has been released in the Brockenhurst College case (C-699/15). This was a UK referral asking whether supplies of restaurant and entertainment services made by a college to paying members of the public (who were not the recipients of the college’s principal supply of education) are ‘closely related’ to the provision of education, and therefore exempt from VAT under EU law. The supplies were made or facilitated by the catering and performing arts students (being the recipients of the college’s principal supply of education) as part of their courses, and were an essential part of their education.

Brockenhurst operated a restaurant in which catering functions were undertaken by students under the supervision of their tutors. The restaurant charged for the meals at subsidised rates.The college’s performing arts  students  aslo staged concerts and performances for paying members of the public.

The First-tier Tribunal (FTT) had ruled that the supplies of restaurant and entertainment services by the college to members of the public were exempt from VAT as supplies of ‘services closely related to education’ and on appeal by HRMC the Upper Tribunal upheld the decision. The Court of Appeal decided to refer questions to the CJEU for a preliminary ruling.

The AG  stated that the Directive does not define the concept of supplies ‘closely related’ to education. But it is clear from the actual wording of the provision that it does not cover the supply of goods or services which are unrelated to ‘children’s or young people’s education, school or university education, vocational training or retraining’. Furthermore, the supply of goods or services can be regarded as ‘closely related’ only where they are also considered to be ancillary to the principal supply.

The purpose and objective of the education exemption is that access to the provision of education, for the benefit of pupils, students and trainees, does not become more expensive due to VAT. Also the principle of fiscal neutrality must be taken into account in the interpretation of the exemptions in the Directive. From the perspective of the end consumer (in this case the third parties seeing the shows and eating in the restaurants), it is irrelevant whether the food is consumed in a normal restaurant or in a training restaurant, or in a normal theatre or a college theatre. In both cases, the consumer is fed/entertained and in both cases he pays money for that consumption.

The AG therefore said that closely related transactions do not include the supply of restaurant and entertainment services by an educational establishment to paying members of the public who are not recipients of the education.

This has been a long running case ans should the CJEU agree with the AG’s opinion, colleges which have submitted claims will have to reverse the claim process and revert to treating such income as taxable.  This would impact on the partial exemption position for current and prior years, and in some cases capital goods scheme adjustments, where relevant.

VAT Exemption – what is a non-profit making body?

Certain supplies of sporting, education and cultural services are exempt when provided by a non-profit making body – usually defined as “eligible bodies”. A recent case highlights the importance of ensuring the legal structure is right before assuming exemption will apply.

St Andrew’s College is a boarding school and a registered charity, which owned two subsidiary companies with which it was registered in a VAT group. The companies provided facilities for playing sport and the VAT group intended that these services should be exempt.  HMRC challenged the intended treatment on the basis that the subsidiaries did not qualify as “eligible bodies” under VAT Act 1994, Schedule 9, Group 10 (which provides exemption for sport, sports competitions, and physical education). It was agreed that all the other criteria were met, so the case turned on the definition of an “eligible body”.  There was no dispute that the College, as an educational charity, was itself an eligible body. But the subsidiaries were considered as ordinary companies limited by shares. That meant that even though as the representative member of the VAT group, the College was treated as making all supplies made by the subsidiaries, and although their profits were covenanted up to the College this was insufficient to meet the test for exemption.

In order to be regarded as an eligible body the subsidiaries were required to be non-profit making bodies.  What was relevant was whether the subsidiaries were restricted in their ability to distribute profits   The UT formed the view that there was no specific restriction and the deeds of covenant did not, of themselves, establish that the subsidiaries could make distributions only to non-profit making bodies. Consequently, the subsidiaries failed to qualify for exemption and the UT found that the First Tier Tribunal had correctly held that output tax was due on the subsidiaries income.

Why it matters

This case highlights the importance of putting in place the correct legal structure to reflect the intention of the supplier.  In this case, it would have been relatively simple to arrange matters to ensure the relevant distribution restrictions were in place. 


The Longridge VAT case – meaning of “business” actvity in a charity

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.

ECJ rules on VAT and handling of credit and debit card payments

The Eurpean Court has delivered its judgments in the “payment handling” cases of National Exhibition Centre Limited  and Bookit Limited .  The cases concerned the VAT treatment of fees charged by the NEC and Bookit and whether they were exempt from VAT as payments for handling debit and credit card payments.  In both cases, the CJEU has decided that the fees charged were not within the scope of the EU law exemption for “…transactions … concerning … payments, transfers …” and it therefore follows that they were subject to VAT at the standard rate.

Bookit is a separate but wholly owned subsidiary of Odeon Cinemas, Bookit charged the custmers a card handling fee for paying by card but it was the Cinemas which supplied the customers with the tickets;   NEC  acted as disclosed agent in selling tickets for third party unconnected promoters and charged a booking fee to customers paying by card.

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VAT and tripartite agreements: the Airtours case

The Supreme Court has released its decision in the Airtours Holidays Transport Limited case. The  Court dismissed Airtours  appeal, by a narrow (3-2) majority, and the fact that this was not a majority decision illustrates what a difficult area of VAT this is.

A tripartite situation arises where C pays A to provide something to B at no cost to B. In this case Airtours was in financial difficulty and a report was commissioned from PwC on its financial health to satisfy its lenders (the “Banks”) that a proposed refinancing was viable.  Airtours paid for the report.  The question was whether the input tax on PwC’s fee was claimable by Airtours or was proper to the Banks – i.e., whether PwC supplied its services to Airtours or the Banks, or both. Read more