The Upper Tribunal resists HMRC’s preferred test as to what constitutes a business activity for VAT purposes, writes Peter Jenkins (Peter Jenkins Associates)
The issue in HMRC v Longridge on the Thames [2014] UKUT 0504 (reported in Tax Journal, 19 November 2014) was whether construction services supplied to Longridge should be zero-rated for VAT purposes, because they related to supplies for a building that was intended for use solely for relevant charitable purposes. HMRC decided that the supplies were not zero-rated. The FTT allowed an appeal against that decision ([2013] UKFTT 158 (TC)). The Upper Tribunal judge concluded that the FTT had applied the correct test in evaluating the facts and that there were no grounds for disturbing its conclusion that Longridge does not carry on an economic activity at the site.
The decision upholds earlier case law analysis of what does and does not constitute business activity, taking into account the judgment of the CJEU in Commission v Finland (C-246/08). It decides what constitutes business activity in the context of a charity charging fees for community and social services which are in fulfilment of its charitable aims and objectives. Even though carried out efficiently and on sound business principles, the activities will be non-business if they are directly concerned with fulfilling the charity’s objectives, rather than with generating commercial profit – it then becomes ‘innately non-business in nature’. Indications of non-business activity include subsidised fees to many users, extensive use of volunteers and capital spend financed by donations and grants. It is not enough merely to carry out a charitable activity; you need to look at the observable terms, the features of the activity and the wider context in which it is carried out. If the intrinsic nature is non-business,that is sufficient, even if it involves making supplies for consideration under a contract.
This decision upholds the analysis Judge Hellier in the recent Capernwray case [2014] UKFTT 626 (TC) and the High Court decisions in Yarburgh [2002] STC 207 and St Paul’s [2005] STC 95, making it clear that they are not overturned by the developing CJEU jurisprudence in Finland.
The charitable purpose of Longridge and the fact that it did not aim systematically to make a commercial profit were not in themselves enough to get to this result. It is the wider assessment of the observable facts and features of what it did and the context in which it did it that is important. It is also worth noting that HMRC’s counsel, presumably on instructions from the supply policy team, sought to argue (as he did in Capernwray) that the effect of the Finland case was to overturn previous case law, including not only St Paul’s and Yarburgh (which HMRC has never really accepted as correct), but also Lord Fisher [1981] STC 238 and Morrison’s Academy [1978] STC 1, insofar as they laid down tests or indicia for what is business.
It is clear that HMRC would like to see a much simpler test introduced on its reading of the Finland case: that anything performed as a contractual obligation for consideration by a legal person is business, and the aim or context are not relevant factors. So far, the tribunal and higher courts have resisted this, and the UT is a court of precedence. HMRC may of course seek leave to appeal to the Court of Appeal.
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The UT on Longridge: relevant charitable purpose
The Upper Tribunal resists HMRC’s preferred test as to what constitutes a business activity for VAT purposes, writes Peter Jenkins (Peter Jenkins Associates)
The issue in HMRC v Longridge on the Thames [2014] UKUT 0504 (reported in Tax Journal, 19 November 2014) was whether construction services supplied to Longridge should be zero-rated for VAT purposes, because they related to supplies for a building that was intended for use solely for relevant charitable purposes. HMRC decided that the supplies were not zero-rated. The FTT allowed an appeal against that decision ([2013] UKFTT 158 (TC)). The Upper Tribunal judge concluded that the FTT had applied the correct test in evaluating the facts and that there were no grounds for disturbing its conclusion that Longridge does not carry on an economic activity at the site.
The decision upholds earlier case law analysis of what does and does not constitute business activity, taking into account the judgment of the CJEU in Commission v Finland (C-246/08). It decides what constitutes business activity in the context of a charity charging fees for community and social services which are in fulfilment of its charitable aims and objectives. Even though carried out efficiently and on sound business principles, the activities will be non-business if they are directly concerned with fulfilling the charity’s objectives, rather than with generating commercial profit – it then becomes ‘innately non-business in nature’. Indications of non-business activity include subsidised fees to many users, extensive use of volunteers and capital spend financed by donations and grants. It is not enough merely to carry out a charitable activity; you need to look at the observable terms, the features of the activity and the wider context in which it is carried out. If the intrinsic nature is non-business,that is sufficient, even if it involves making supplies for consideration under a contract.
This decision upholds the analysis Judge Hellier in the recent Capernwray case [2014] UKFTT 626 (TC) and the High Court decisions in Yarburgh [2002] STC 207 and St Paul’s [2005] STC 95, making it clear that they are not overturned by the developing CJEU jurisprudence in Finland.
The charitable purpose of Longridge and the fact that it did not aim systematically to make a commercial profit were not in themselves enough to get to this result. It is the wider assessment of the observable facts and features of what it did and the context in which it did it that is important. It is also worth noting that HMRC’s counsel, presumably on instructions from the supply policy team, sought to argue (as he did in Capernwray) that the effect of the Finland case was to overturn previous case law, including not only St Paul’s and Yarburgh (which HMRC has never really accepted as correct), but also Lord Fisher [1981] STC 238 and Morrison’s Academy [1978] STC 1, insofar as they laid down tests or indicia for what is business.
It is clear that HMRC would like to see a much simpler test introduced on its reading of the Finland case: that anything performed as a contractual obligation for consideration by a legal person is business, and the aim or context are not relevant factors. So far, the tribunal and higher courts have resisted this, and the UT is a court of precedence. HMRC may of course seek leave to appeal to the Court of Appeal.
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