Commissioners of Customs and Excise v Church Schools Foundation Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 November 2001 |
| Date | 20 November 2001 |
| Court | Value Added Tax Tribunal |
Chancery Division.
Neuberger J.
Miss Melanie Hall (instructed by the Solicitor for Customs and Excise) for the Crown.
David Milne QC and Richard Vallat (instructed by Nabarro Nathanson) for the taxpayer.
The following cases were referred to in the judgment:
C & E Commrs v Redrow Group plc VAT[1999] BVC 96
Naturally Yours Cosmetics Ltd v C & E Commrs VAT(Case 230/87) (1988) 3 BVC 428
Ponsford v HMS Aerosols Ltd ELR[1979] AC 63
Tolsma v Inspecteur der Omzetbelasting Leeuwarden VAT(Case C-16/93) [1994] BVC 117
Value added tax - Consideration for a supply - Whether payment by one charity to an associated charity with the same objects was consideration for a supply - Value Added Tax Act 1994 section 4 subsec-or-para (1) section 5 subsec-or-para (2) schedule 6 subsec-or-para 1Value Added Tax Act 1994, ss. 4(1), 5(2)(a), (b), Sch. 6, para. 1(1) - Sixth Council directive (Directive 77/388) of 17 May 1977 (OJ 1977 L145/1), eu-directive 77/388 article 2(1) article 6(1) article 11(A)(1)art. 2(1), 6(1) and 11(A)(1)(a).
The taxpayer charity ("the Foundation"), together with another charitable company, the Church Schools Company ("the Company"), operated church schools. The Company ran the schools and the Foundation owned the property and was responsible for capital works on that property. The Foundation charged a market rent (plus VAT) for the land, based on the profitability of the schools. The companies were not within a VAT group. Both functions had originally been carried out by the Foundation, but in 1993 it was decided that the operation would be more efficient if separate. The Company made a grant of £1m to the Foundation. This money was spent on improving the properties, but was not assigned to any particular purpose. The commissioners assessed the Foundation for VAT on the basis that this grant was consideration for a supply. The tribunal allowed the Foundation's appeal (No. 16,464; [2000] BVC 2213), and the commissioners appealed to the High Court.
Whether the payment of £1m was consideration for a supply for VAT purposes.
Held, allowing the commissioners' appeal:
To be consideration for a supply of a payment there had to be a "legal relationship" between the parties pursuant to which payment was made and there had to be a direct link between the payment and the supply. In this case, the evidence showed that there was an arrangement between the parties which amounted to a sufficient "legal relationship". There was also a sufficient direct link, in that, broadly, the Company made the payments in order that the foundation could spend the money on improving the schools. Accordingly, the payment was consideration for a supply for VAT purposes.
Neuberger J: Introduction
1. This is an appeal against a decision of the London VAT and Duties tribunal ("the tribunal") released on 20 January 2000. The tribunal, consisting of Mr Stuart Lightman, allowed an appeal by the Church Schools Foundation Limited ("the Foundation"), a charitable limited company, against a decision of the Customs and Excise commissioners to the effect that a sum of £148,936 was payable by the Foundation as output tax. The issue for determination by the tribunal was whether the sum of £1m paid to the Foundation by the Church Schools Company ("the Company"), a charitable company limited by guarantee, could properly be characterised as consideration for a supply upon which VAT is payable.
2. The basic facts found by the tribunal are largely uncontroversial, and may be summarised as follows. Prior to 1993, the Foundation (then confusingly called the Church Schools Company Ltd) owned and operated seven schools ("the schools"). Having been appointed chief executive of the Foundation in 1990, Mr Ewen Harper considered that it would be more efficient to split the activities of the charity between two entities. Accordingly, the Company was formed to run the schools, with a council containing representatives from the schools. The Foundation continued to manage the properties, from which schools were run ("the school properties"); it had a rather smaller board than before.
3. According to the Memorandum of Association of the Company its objects are:
To provide … by the establishment and maintenance of schools, a liberal, practical, and general education, for children and adults … such education to include religious instruction in the doctrine and duties of Christianity … to assist in such manner as the council may think fit (including without limitation by the making of grants) and otherwise to promote the establishment and maintenance of schools conducted … by any charitable institution on the same or similar principles as those on which the schools operated by the Company are conducted.
4. As the ownership of the school properties remained vested in the Foundation, it granted a lease of them to the Company on 18 March 1993, for a term commencing on that date and expiring on 31 August 2012. To satisfy both the charity commissioners (because the Foundation had to take reasonable steps to maximise its income) and Customs and Excise commissioners ("the commissioners") in light of Value Added Tax Act 1994 schedule 6 subsec-or-para 1para. 1(1) of Sch. 6 to theValue Added Tax Act 1994 (as the Foundation elected to wave exemption in respect of VAT on the rent), the rent reserved under the lease was the aggregate of the market rents of the schoo1 properties. That rent initially was £372,500 per annum, but it was subject to review every three years to the aggregate of the then open market rental values of the school properties, disregarding any improvements carried out by the company with the Foundation's consent.
5. The lease also contained covenants by the Company, as tenant, in relation to alterations to the school properties. Clause 7.1 prohibited alterations which had not first been notified to the Foundation. Clause 7.2 provided that the Foundation could elect to carry out the alterations itself. Clause 7.3 permitted the Company to carry out the alterations provided that the Foundation had not elected to invoke cl. 7.2 and had given its consent (which was not to be unreasonably withheld). The rent under the lease has been reviewed in accordance with its terms: in March 1996, it was increased to £591,250 per annum, and in March 1999 to £636,727 per annum.
6. The Foundation appreciated that, if the schools were to maintain, indeed to increase, their standards, the school properties would have to be improved. In his evidence, Mr Harper said:
The … Company had to accept that to receive the property improvements needed, it would have to allow [the Foundation] to share in the improved surpluses which were planned.
7. With that in mind, on the same day as the grant of the lease, 18 March 1993, the Company wrote to the Foundation a letter ("the letter"):
To confirm that it is the intention of the Trustees of [the] Company, where cash surpluses arise in this Company, to grant those surpluses to [the Foundation] in so far as to do so will be consistent with, and conducive to the attainment of, the objects of this charitable Company.
On the same day, the directors of the Foundation referred to the resolution contained in the letter as being for the purpose of:
minimis[ing] the borrowing requirements of the … Foundation … in its commitment to finance the building programme agreed between the two charities
.
8. Since 1993, the Foundation has spent some £25m (inclusive of VAT) on carrying out works of improvement to the school properties. This has been paid for with funds from a number of sources: the sale of surplus land, commercial borrowing, rents paid by the Company, and gross sums received from the Company, described as "charitable grants" by Mr Harper in his evidence to the tribunal. These grants, as I will call them, amount to a total of £4.8m, paid in four tranches, two of £1m (in June 1995 and December 1997), and two of £1.4m (in January and December 1996). The commissioners assessed the Foundation to liability for VAT in respect of each of those grants, but it is only in respect of the first grant of £1m with which this appeal is strictly concerned.
9. Minutes of the council of the Company and of the board of the Foundation show that one normally met immediately after the other. The minutes also show a degree of correlation between the Foundation's decision to carry out works of alteration or extension to the school properties or to extend those properties, and the Company's decision to provide grants to the Foundation. Thus on 17 June 1993, an accelerated programme for carrying out certain works of improvements to the school properties was considered, and the minutes of the Foundation's board record that:
The Board approved the accelerated programme subject to confirmation by the … Company that it would enter into the necessary financial obligations.
Later on the same day, the council of the Company agreed the proposal:
That the accelerated capital expenditure programme … be approved and that the Council commits the … Company to the necessary financial support for the programme as recommend by the Finance Committee.
10. On 26 November 1993, the council of the Company resolved:
That the tender of £1,655,877 [for work to Guildford High School] be approved and recommended for acceptance to the … Foundation. It was also resolved that the Company would support financially the decision made by the … Foundation … to proceed with the contract, should they decide to do so.
On the same day, the board of the Foundation resolved to accept the tender and "also noted that the council of the … Company had resolved to financial support this decision".
11. On 8 June 1994, the Foundation's board approved the purchase of playing fields for £670,000:
Assuming that the continuing financial support of the … Company would be approved by...
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