French Education Property Trust Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 December 2015 |
| Neutral Citation | [2015] UKFTT 620 (TC) |
| Date | 01 December 2015 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Anne Redston, Shameem Akhtar
Roger Thomas of Counsel, instructed by PricewaterhouseCoopers LLP, appeared for the Appellant
Jonathan Bremner of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax – Whether building intended for use solely for a “relevant charitable purpose” – Appellant intending to lease building to second charity – Intention that second charity use building as fee-paying school – Whether either or both an economic activity – Whether receipt of remuneration gives rise to a presumption of economic activity – Whether profit motive and/or intention to maximise returns required – Whether the “predominant concern” factor in C & E Commrs v Lord Fisher (1981) 1 BVC 392 is inconsistent with ECJ case law – Whether the rent was intended to be “concessionary” – Value Added Tax Act 1994 (“VATA 1994”), Sch. 8, Grp. 5, item 1, note (6)(a) – Directive 2006/112 (the Principal VAT Directive), art. 9(1) – Company's appeal dismissed.
The First-tier Tribunal (FTT) dismissed the appeal by French Education Property Trust Ltd (“FEPT”) against HMRC's decision that it had not been entitled to issue to contractors some certificates for zero-rated building work that began in June 2010 at a listed building.
“FEPT”, a registered charity, acquired and then renovated a listed building (“the Property”), issuing zero-rate certificates to the contractors. FEPT leased the Property to another charity “CFBL”, which operated a fee-paying school (“the College”) at the Property. FEPT solicited and received donations to help finance the renovation of the Property.
Zero-rating was available only if the Property was intended for use solely by a charity “otherwise than in the course or furtherance of a business” VATA 1994, (Sch. 8, Grp. 5, item 1, note (6)(a)). The term “business” has the same meaning as “economic activity”. There was no dispute that FEPT intended, at all times in the relevant period, to lease the Property to CFBL for it to be used as a fee-paying school. There was no statutory basis for treating the two charities as if they were one entity (para. 124 of the decision).
The FTT held that, for its appeal to succeed, FEPT must show that both (1) the granting of a lease to CFBL, and (2) CFBL's use of the Property as a fee-paying school, were otherwise than in the course or furtherance of a business. If FEPT failed on either issue, its appeal must fail (para. 126 of the decision).
The FTT held that the second sentence of Directive 2006/112, art. 9(1) does not compel a finding that there has been an economic activity by FEPT simply on the basis that there has been the letting of the Property for rent. Instead, the wider circumstances must be considered (para. 155 of the decision).
The FTT found as a fact that FEPT had set the rent and charges to cover the interest on bank loans and other costs related to managing the Property, and not to make a profit (para. 160 of the decision).
The FTT held that, where the final sentence of art. 9(1) is not engaged, there is no support in the case law for a finding that a profit motive is required before there can be an “economic activity”. Moreover, such a finding would be inconsistent with the words in the first sentence of art. 9(1), which provide that there can be an economic activity “whatever the purpose or results of that activity” (para. 167 and 168 of the decision).
At para. 91 of the decision, the FTT held that the charitable purposes of FEPT and CFBL are not relevant as such, but, as Rose J said in R & C Commrs v Longridge on the Thames VAT[2014] BVC 546 at para. 38, “… it is possible and indeed necessary to take into account the charitable nature of the activity as part of its “observable terms and features” whilst avoiding the twin heresies of (1) taking account of the purpose for which the activity is conducted or (2) regarding an activity as not “economic” because it is non-profit making”.
The provision of education by schools is exempt from VAT. However, it is first necessary to establish whether an activity is “economic” before considering whether it is eligible for exemption. The mere existence of the exemption does not decide the matter (para. 194 of the decision).
FEPT argued that the lease was not at full market rent and that the purpose was to facilitate the use of a new building by CFBL. FEPT accepted that the factors, which help decide whether a business was operated and which are listed at p. 398 in C & E Commrs v Lord Fisher VAT(1981) 1 BVC 392, were satisfied by FEPT, other than factor (e), because when granting the lease to CFBL, FEPT was not “predominantly concerned with the making of taxable supplies to consumers for a consideration”.
The FTT held that there was a “commercial imperative” as regards the lease, because FEPT must receive the rent, so that it can service the substantial loan incurred in buying the Property. From this, the FTT found that its predominant concern in leasing the property to CFBL and requiring the further charges to be paid was to obtain an income sufficient to cover its financial obligations (para. 227 of the decision).
The FTT noted that FEPT is a charity and in letting the Property to CFBL it did not have a profit motive. However, it granted a 25-year lease in order to recover all the costs incurred in the Property's acquisition, renovation and management, other than the part covered by donations. All the “Lord Fisher” factors were met, i.e. the letting was intended to be a serious undertaking earnestly pursued, with recognisable continuity and more than a certain measure of substance. It operated on sound and recognised business principles and in a regular manner. The facts were far different from those in C & E Commrs v Yarburgh Children's Trust VAT[2002] BVC 141. There was not a relatively informal arrangement with a lease substantially below a full market rent. Neither was it, at the relevant time, expected to be an isolated letting, instead the plan was for FEPT to be a the property company for several French schools in the UK (para. 296 to 298 of the decision).
The FTT held that the terms and features of FEPT's letting to CFBL showed that the Property was intended for use by FEPT in the course of an economic activity (para. 300 of the decision).
As the appeal had failed, it was unnecessary for the FTT to consider the use of the Property by the College. However, as that Issue was fully argued, and in case a further appeal is heard, the FTT considered the matter.
The FTT found as a fact that the College operated in a market, and so its use of the Property could be an economic activity (para. 320 of the decision).
The FTT held that all the “Lord Fisher” factors indicated that the College used the Property for an economic activity (para. 334 and 335 of the decision).
The FTT decided that the College was not aiming to make a surplus on its operations (para. 338 of the decision).
The FTT took into account CFBL's charitable status and the fact that it was carrying out its charitable objects by running the College. These are pointers away from there being an economic activity, but they are not conclusive (para. 340 of the decision).
The overwhelming impression from the evidence was that the College was a professionally run business and that the activity of running the College did not fall outside the wide meaning given to the term “economic activity” (para. 342 and 344 of the decision).
The observable terms and features of the activities carried out by an independent fee-paying school frequently, but not invariably, mean that it is carrying on an economic activity. It was not enough to be a charity, because use is only for a “relevant charitable purpose” if it is “otherwise than in the course or furtherance of a business” (or “as a village hall or similarly”).
The FTT classified the appeal as complex, which allows it to make an order for costs. Both parties asked for their costs if they were successful. Usually, HMRC apply for costs, although the parties may agree costs between themselves.
The parties had agreed that, if the FTT allowed FEPT's appeal, then HMRC would then consider whether the alterations to the Property were “approved alterations” within VATA 1994, Sch. 8, Grp. 6, note (6), which subject to transitional provisions, was repealed from 1 October 2012. In view of the FTT's decision, no such further consideration was required.
[1] French Education Property Trust Limited (“FEPT”) is a registered charity. At some point its name changed to KT Educational Trust Limited, but in this decision we refer to it as FEPT.
[2] In 2009 FEPT acquired and subsequently renovated a listed property in Holmes Road, Kentish Town, London (“the Property”), issuing VAT zero-rate certificates to its contractors. FEPT leased the Property to another charity, the College Français Bilingue de Londres (“CFBL”). CFBL operates a fee-paying school (“the College”) from the Property.
[3] It was common ground that zero-rating is only available if the Property was intended for use solely by a charity “otherwise than in the course or furtherance of a business” and that the term “business” has the same meaning as “economic activity.”
[4] HMRC decided that FEPT had not been entitled to issue the zero-rate certificates to its contractors, because it intended to lease the Property to CFBL for use as a fee-paying school. FEPT appealed that decision. For the reasons given below, we dismiss the appeal.
[5] The Tribunal was provided with several files of documents, which included the following:
1) correspondence between the parties and between the parties and the Tribunal;
2) the Articles of Association of FEPT and of CFBL;
3)...
To continue reading
Request your trial