Longridge on the Thames v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Tomlinson,Mr Justice Morgan |
| Judgment Date | 01 September 2016 |
| Neutral Citation | [2016] EWCA Civ 930 |
| Docket Number | Case No: A3/2015/0462 |
| Court | Court of Appeal (Civil Division) |
| Date | 01 September 2016 |
[2016] EWCA Civ 930
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
(Tax and Chancery Chamber)
Mrs Justice Rose
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Tomlinson
and
Mr Justice Morgan
Case No: A3/2015/0462
Kieron Beal QC and Michael Jones (instructed by HMRC Solicitor's Office) for the Appellants
Roger Thomas QC (instructed by Ashurst) for the Respondent
Hearing dates: 20 – 21 April 2016
Approved Judgment
OVERVIEW: DO LONGRIDGE'S ACTIVITIES AMOUNT TO ECONOMIC ACTIVITY FOR VAT PURPOSES?
VAT is payable where a person carries on an economic activity, but the line may be difficult to draw between activity and economic activity where a person provides a service for a payment but that payment does not represent the full cost of the service. The case law of our courts shows that this is a problem that often arises with charities and the issue is which side of the line the respondent charity falls. In other words, by what test or process should genuinely non-economic activity be ascertained?
The primary activities of the respondent, Longridge on the Thames ("Longridge") are the provision of water-based and other outdoor activities (for both recreational and educational purposes) and the giving of instruction in how to undertake such activities. It provides these to people of different ages, although its focus is on youth. Longridge operates from a site on the banks of the Thames in Marlow. It makes a charge for these facilities but that charge may be adjusted to meet the ability of the end-user to pay insofar as donations or receipts from other activities permits this. It is not registered for VAT and therefore does not charge VAT on its supplies.
Longridge has recently built a new training centre. It had to pay VAT on the construction of the building amounting to some £135,000. It now wants to recover that sum. It contends that the supplies made on constructing the training centre should be zero-rated under Items 2 and 4 of Group 5 of schedule 8 to the Value Added Tax 1994 (" VATA 1994"), set out in the Appendix to this judgment, on the grounds that the building was intended for use solely for relevant charitable purposes within the meaning of Note (6) to Group 5. A zero-rated supply is a taxable supply chargeable at a zero rate and entitling the supplier to recover all of the input tax attributable to his zero-rated supplies.
The appellants ("HMRC") disagreed. HMRC considered that the activities of Longridge amounted to carrying on business activities and so the training centre did not meet the conditions in schedule 8.
Longridge successfully appealed this determination to the First-tier Tribunal ("FTT"). HMRC then appealed to the Upper Tribunal. Both the FTT and the Upper Tribunal followed domestic authorities where the courts have looked at the wider context in order to determine whether the provision of services for a money payment constituted an economic activity for VAT purposes.
The nub of HMRC's case is that this approach is not consistent with EU law. HMRC contend that the Court of Justice of the European Union ("the CJEU", in which expression I also include its predecessor the European Court of Justice) has recently clarified the test for determining whether there is an economic activity and that this now focuses on whether there is a direct link between the service which the recipient receives and the payment which he makes, not on the wider context in which the payment was made. If the direct link is not present, there is no economic activity.
To answer this question, this Court needs to examine many authorities. At the end of the day, and for the detailed reasons given below, I consider that HMRC are correct. The correct test is one of direct link. In this case, the FTT and Upper Tribunal misdirected themselves. In my judgment, the appeal should therefore, be allowed.
Unless otherwise stated, paragraph references to authorities of the Court of Justice of the European Union are to paragraph references in the judgment of the CJEUand not to the paragraphs of the opinion of the Advocate General.
I shall start by setting out the legislative framework and summarising the decisions of the FTT and Upper Tribunal. I shall then set out the parties' submissions and my reasons for my conclusion that this appeal should be allowed.
LEGISLATIVE FRAMEWORK
The relevant EU provisions are set out in the Appendix to this judgment and consists of provisions of the European Community Council Directive 2006/112/EC ("the Principal VAT Directive"). This replaces the VAT directives previously in force, including the Sixth VAT Directive (77/388/EEC). Unless otherwise stated, there is no material change between the Sixth Directive and the Principal VAT Directive so far as this appeal is concerned save for the change in the numbering of Articles.
The Appendix also sets out the relevant domestic implementing provisions. These are now to be found in the VATA 1994.
Unless it otherwise appears, references in this judgment to Articles are to Articles of the Principal VAT Directive and references to sections are to sections of VATA 1994.
This appeal turns on the meaning of economic activity in the definition of "taxable person" in Article 9(1). Article 9(1) is implemented by VATA 1994, section 4.
The approach to interpreting the relevant domestic legislation is clear. As Lord Slynn explained in Institute of Chartered Accountants in England and Wales v Customs & Excise Commissioners [1999] 1 WLR 701 ("ICAEW"), section 4 must be interpreted in accordance with the Principal VAT Directive:
There is a difference in the wording between s 4 of the 1994 Act and arts 2 and 4 of the Sixth Directive. Thus the 1994 Act refers to 'taxable supply made by a taxable person in the course or furtherance of any business carried on by him [emphasis added]'. The Sixth Directive refers to the supply of services 'effected for consideration… by a taxable person acting as such [emphasis added]' and taxable person means a person who independently carries out any economic activity, including 'the activities of the professions'. The 1994 Act must so far as possible be construed so as to give effect to the Sixth Directive (see Marleasing SA v La Comercial Internacional de Alimentacion SA ( Case C-106/89) [1990] ECR 4135). It does not seem to me that there is any difficulty here in doing that and one would expect the same result to follow from the application of either approach.
If read literally, it can be argued as Mr Andrew Thornhill QC on behalf of the institute has done, that in granting these licences for a fee, the institute is supplying services in the course of a business, or is supplying services for consideration in the carrying on of an economic activity. But so far as the Sixth Directive is concerned, the Court of Justice of the European Communities has made it clear that it is not enough merely to point to the fact that there is a supply of services in return for a money payment and some loose economic connection, but that the activities must be of an 'economic nature' (see Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen, Arnhem ( Case C-60/90) [1993] STC 222 at 238, [1991] ECR I-3111 at 3136–3137, para 11).
DECISION OF THE FTT
The FTT made detailed findings of fact about the nature of Longridge's activities. The facilities were used by a very substantial number of people: in the 11 months to 25 November 2012, 27,119 individuals took part in Longridge's courses. There was corporate use of the upper floor of the training centre but this use was not substantial.
As to the charges which Longridge made for its facilities, Longridge had a published list of charges but it offered discounts or waived charges entirely where it considered that course was justified, for example, where there were groups of young people with physical disabilities or other special needs. The FTT also found that there was a substantial number of volunteers who contributed with their time and skills without charge for the purposes of Longridge's courses and activities.
The FTT concluded on the basis of the authorities shown to it that the principal question was whether in carrying out its activities generally Longridge was carrying on a business. The FTT referred to the decision of the CJEU in Case C-235/85 Commission v Netherlands [1987] ECR 1471. In its judgment in that case the CJEU held that the question whether a person is engaged in economic activity is to be decided objectively, without reference to the purposes or results of the activity so that an entity might be carrying out an economic activity even though its activities were charitable.
The FTT would have found, if it were crucial to do so, that, whilst by far the greater part of Longridge's activities was directly by way of carrying out its charitable objectives, a small part was not, although they furthered its charitable objectives by raising funds to subsidise its work.
The FTT accepted that there might be a presumption by reason of Article 2 and implicit in Article 9(1) of the Principal VAT Directive that, where goods or services were provided for a consideration, the activity was a business. But the FTT went on to apply the criteria applied in HMRC v Yarburgh Children's Trust [2002] STC 207. It noted that the approach of Patten J in that case was followed in HMRC v St Paul's Community Project Limited [2005] STC 95 (Evans-Lombe J). It was necessary to identify in objective terms what the activity was in order to determine whether it was an economic activity and to identify what in truth...
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