Church of England Children's Society v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BLACKBURNE,Mr Justice Blackburne |
| Judgment Date | 29 July 2005 |
| Neutral Citation | [2005] EWHC 1692 (Ch) |
| Date | 29 July 2005 |
| Court | Chancery Division |
| Docket Number | Case No: CH/2004/APP/0467 (lead appeal) |
[2005] EWHC 1692 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon Mr Justice Blackburne
Case No: CH/2004/APP/0467 (lead appeal)
(and CH/2004/APP/0498 cross appeal)
David Milne QC (instructed by Nabarro Nathanson) for the Appellant
Kenneth Parker QC and Paul Harris (instructed by Solicitors for HM Revenue and Customs) for the Respondent
Hearing date: 20 June 2005
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Blackburne
Introduction
This is an appeal, with a cross-appeal, against the decision of the VAT and Duties Tribunal (Dr Nuala Brice, chairman, and Mr L G Wilkinson FCIB) ("the Tribunal") released on 8 June 2004 allowing in part an appeal by The Church of England Children's Society ("the Society") against a decision of the Commissioners of Customs and Excise dated 14 October 2002. By that decision the Commissioners refused to allow input tax credit in the sum of £253,500.56 claimed by the Society in its June 2002 return. The sum was taxed on the supply to the Society of fundraising services and of goods and services relating to the production and distribution of a newsletter. The newsletter was provided by the Society to committed donors to the Society who agreed to make regular donations of money to it.
The input tax was disallowed because the Commissioners were of the view that the provision of the newsletter by the Society to the committed donors was not a supply because it was not made for a consideration. The Society appealed contending that the provision of the newsletter was made for a consideration and so was a supply. Alternatively, it argued that, even if there was no consideration, the provision of the newsletter was to be treated as a supply because it was a transfer or disposal of assets of the business.
The Tribunal's findings of fact
So far as material to this appeal, I can recite the Tribunal findings of fact fairly shortly.
The Society, which is a company limited by guarantee, is registered for VAT and is a charity. It has among its objects "to care for and support children and young persons in need, whether material, physical, mental, emotional or spiritual, and to promote their physical, mental, emotional and spiritual development (whether through their families, community or otherwise howsoever) in accordance with the principles of the Church of England". In furtherance of those objects the Society has power to provide residential and day care establishments and social work support for children and young persons, to place children and young persons with adopters or in suitable homes with foster parents, and to establish and maintain schools and institutions for the education and training of children and young persons. Children and young persons are defined as persons up to the age of twenty-five years.
In the year to March 2002, the Society's income was £35,892,000 of which £26,701,000 derived from fundraising. Most of the fundraising income came from legacies and donations with some from fundraising events such as fun runs, treks and pilgrimages, some from other activities, and with some from shops. Of the total income which was not from fundraising, most came from fees and grants from local authorities and central government of which about £9 million was paid to the Society by local authorities and central government under contracts to provide welfare services. In the Society's financial statements for 2001/2002, income was listed under two heads: (1) "voluntary income sources" comprising, among others, legacies, donations (including donations from so-called committed givers), collecting boxes and parish giving; and (2) "incoming resources from operating activities" comprising, among others, income from welfare services provided to local authorities and central government, fundraising events and shops.
In paragraph 19 of the decision the Tribunal stated that for the purposes of value added tax the Society carried on business activities and made both standard-rated supplies (for example, the sale of donated goods in charity shops) and exempt supplies (for example, the provision of welfare services under contract to local authorities and central government, and fundraising events). The Tribunal noted that before the establishment of the committed givers club (see below) the Society treated the value added tax it paid on supplies connected with its newsletters as residual input tax.
In June 2001 the Society reviewed the progress of its direct giving campaign and was advised that there would be benefits in offering a membership scheme with a minimum monthly subscription. The intention was that scheme members would receive a regular publication produced specifically for them as a direct benefit of their subscription. This was seen as enabling the Society to recover the input tax on the costs of acquiring the new members. The proposal was that a membership scheme should be introduced with the membership fee set at £5 per month, to be paid by direct debit.
The Society employed professional fundraisers to canvas members of the public in the street and to encourage them to make donations. The fundraisers were told that, when canvassing, they should make reference wherever possible to the fact that committed supporters who pledged £5 per month or more by direct debit would be entitled to receive exclusive regular newsletters about the Society's work and would automatically join the Society's so-called committed givers club.
The professional fundraisers, who supplied the fundraising services, were paid a single fee by the Society for each donation of £5 or more. The fee was repayable to the Society in whole or in part if the donation ceased within the first three months.
The newsletters, which were only sent to committed givers who had not cancelled or missed their payments, were published by the Society which paid for the provision of supplies to it in connection with its publication. Examples include supplies from the photographer of photographs used in it, from an illustrator who provided illustrations for an article in it, from a printer for the provision of proofs and for polywrapping the newsletter, from an envelope supplier for supplying envelopes and from another supplier for the design, typesetting and artwork involved in producing the newsletter. The edition of the newsletter which appeared closest to the date of the assessment in issue had 16 pages and contained a full-page advertisement for a sponsored trek, a contents and editorial page, a news review about the work of the Society, an article on Youth Justice and another on Young Carers, some fundraising news about sponsored events and a letters page.
Relying upon correspondence passing between representatives of the Commissioners and the Society in the course of October 2001, the Society included in its return for the accounting period ending on 30 June 2002 a claim for input tax credit in respect of the tax paid to the suppliers of the fundraising services relating to the committed givers, and also of goods and services relating to the production and distribution of the newsletters. The Society treated the amounts received from the committed givers who paid less than £5 per month as being made by way of donation and so outside the scope of value added tax. It treated the amounts received from committed givers who paid £5 per month as being made by way of consideration for the taxable supply of the newsletter. It treated the amounts received from committed givers who paid more than £5 per month as being made partly (to the value of £5) by way of consideration for the taxable supply of the newsletter and as to the balance by way of donation.
By letter to the Society dated 14 October 2002, the Commissioners expressed the view that the whole substance of the relationship between the Society and a committed giver was that of the giver making a donation to the Society and did not involve the sale by the Society to the giver of a subscription to the newsletter. Accordingly the claim for input tax credit was refused. In subsequent correspondence the Commissioners at first accepted that the costs of producing the newsletter could be treated as residual input tax, not because the provision of it was a taxable supply but because the costs of producing it were overhead costs of the "truly taxable supplies" that the newsletter supported, but later withdrew that view of matters and stated that "VAT on the costs of producing the newsletter is not properly 'residual' and is therefore not recoverable to any extent".
The Tribunal's conclusions
The Tribunal concluded that the provision by the Society of the newsletter to the committed givers was not done for consideration and so was not a supply within the meaning of section 5(2)(a) of the Value Added Tax Act 1994 ("the 1994 Act"). It went on to conclude, however, that, because it was agreed that the provision by the Society of the newsletter to the committed givers was a deemed supply under paragraph 5(1) of Schedule 4 to the 1994 Act, the Society could recover all the tax on the supply to it of the goods and services used exclusively in the production and distribution of the newsletter but could not recover the tax on the supply of the fundraising services. In the result the Tribunal held that the input tax relating to the production and distribution of the newsletter was recoverable in full but that the input tax relating to the fundraising services was not recoverable at all.
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