R & C Commissioners v Chelmsford City Council
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 June 2022 |
| Neutral Citation | [2022] UKUT 149 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 149 (TCC)
Mrs Justice Joanna Smith, Judge Swami Raghavan
Upper Tribunal (Tax and Chancery Chamber)
In R & C Commrs v Chelmsford City Council [2022] BVC 504, the UT dismissed HMRC’s appeal against a decision of the FTT that the council was acting under a special legal regime when it provided sports and leisure facilities. The UT agreed that the council’s activities were covered by art. 13(1) of the Principal VAT Directive (Directive 2006/112).
Chelmsford City Council is a lead case for a series of appeals made by English and Welsh local authorities regarding the VAT treatment of sports and leisure facilities. Midlothian Council [2020] TC 07910 is a lead case for similar challenge by Scottish local authorities and Mid Ulster District Council [2020] TC 07911 is the lead case in relation to Northern Ireland.
The local authorities involved in the dispute have all submitted claims to recover VAT charged on fees at sports and leisure facilities run by them. art. 13(1) of Directive 2006/112 provides that when they ‘engage as public authorities’ local authorities are not to be regarded as taxable persons, even if collecting fees. All the appellants involved in this litigation argue that they are providing sports and leisure facilities as public authorities and that, therefore, the income arising is not subject to VAT.
The meaning of art. 13(1) has been the subject of extensive litigation at the ECJ (reviewed in detail by the UT at para. 24–48). A key authority is the Fazenda Pública v Câmara Municipal do Porto(Case C-446/98) [2001] BVC 493 case which established that art. 13 applied if the local authority was acting under a ‘special legal regime’.
The FTT ([2020] TC 07909) held that Chelmsford City Council was acting under a ‘special legal regime’. It came to this conclusion on basis of its findings of fact that the council was empowered to deliver leisure services under s. 19 of the Local Government (Miscellaneous Provisions) Act 1976 and that there were clear differences between the legal conditions under which a local council operated compared to a private company. The FTT stated that its conclusion was not affected by the fact that s. 19 only empowered the council, it did not compel the council, to deliver services.
HMRC appealed the FTT’s decision on the grounds that it had erred in law by failing to draw a distinction between ‘sovereign powers’ which are needed to exercise certain activities and statutory powers which merely authorise an activity (para. 29). HMRC’s view was that art. 13(1) only applied to bodies acting under sovereign powers. The UT concluded that, when interpreting art. 13(1), the ECJ jurisprudence did not support this distinction. It remarked that, in order to make its case, HMRC had to ‘emphasise and interpret particular words within the [ECJ’s] judgments (without always having regard to the particular facts of the case) and to focus so much attention on Opinions of the Advocates General which have not been adopted by the Court or which might be said to be equivocal at best’. The UT commented that this was ‘not a promising basis on which to make [the] argument’ (para. 65).
HMRC’s appeal was dismissed.
In case HMRC’s appeal was successful, Chelmsford City Council cross appealed an element of the FTT’s decision. VATA 1994, Sch. 9, Grp. 10, Note 3 exempts supplies of sport by an ‘eligible body’. Note 3 of the group states that a local authority is not an eligible body. HMRC’s view, which was supported by the FTT, is that, as a consequence, if a local authority is supplying sport as a taxable person, its supplies are taxable.
The Council’s argument was that HMRC and the FTT had interpreted Note 3 incorrectly. It argued that the purpose of Note 3 was to implement art. 13(2) of the Principal VAT Directive. art. 13(2) allows Member States to deem certain activities engaged in by public authorities as fulfilling the second condition of art. 13(1), and therefore as carried out by a non-taxable person, even if they are not providing the services under a special legal regime (para. 123).
The UT dismissed the cross appeal on the Note 3 issue, finding that the FTT had interpreted it correctly (para. 145).
Art. 13(1) of the Principal VAT Directive contains two limbs. Under the first limb, if, when it supplies goods or services, a local authority is acting as a public authority it is not acting as a taxable person and, as a consequence, those supplies of goods or services are outside the scope of VAT.
The UT agreed with the FTT that, when providing sports and leisure facilities, Chelmsford City Council was acting under a special legal regime and it was therefore acting as a public authority for the purposes of art. 13(1).
The second limb of art. 13(1) is that, if treating the local authority as a non-taxable person would result in distortion of competition, then they should be treated as a taxable person.
At the FTT and the UT Chelmsford City Council won its argument that the first limb of art. 13(1) applies in this case. Given the significant sums of VAT at stake it is likely that HMRC will appeal the UT’s decision on this point and/or argue that, as a result of the second limb of art. 13(1), the council is required to charge VAT on its supplies of sport and leisure facilities.
Comment by Sarah Kay, Senior Tax Writer at Croner-i.
Raymond Hill, counsel, instructed by the General Counsel and Solicitor to HM Revenue & Customs, appeared for the appellants /respondents in cross-appeal
Amanda Brown QC and Adam Rycroft, KPMG LLP, appeared for the respondent /appellant in cross-appeal
[1] The appellants each appeal against the decision of the First-tier Tribunal (“FTT”) published as Chelmsford City Council [2020] TC 07909 (“the Decision”).
[2] The central issue in the appeal is the VAT liability for admissions charges for sports and leisure facilities (the “Facilities”) provided by the local authority, Chelmsford City Council (“Chelmsford”). In particular, whether, as HMRC contends, Chelmsford was acting as a taxable person when providing the Facilities (and so was subject to VAT) or whether, as Chelmsford argues, it was acting as a public authority pursuant to article 13(1) of the Principal VAT Directive 2006/112/EC (the “PVD”). Under the relevant case-law on article 13 of the PVD, that question turns on whether the body providing the facilities was acting pursuant to a “special legal regime” applicable only to the public authority and not to private operators. The FTT agreed with Chelmsford, that its services were provided under a special legal regime and that, accordingly, the supplies did not bear VAT. HMRC appeal against the Decision on that issue (“the Special Legal Regime Issue”) with the permission of the FTT.
[3] If the FTT was wrong on the Special Legal Regime Issue, a further issue arises regarding the interpretation of a domestic VAT provision (Note 3, Group 10, Schedule 9 of the Value Added Tax Act 1994 (the “VAT Act”)) (“the Note 3 Issue”). That turns on whether (as Chelmsford contends) the terms of Note 3 operated as an exercise of the discretion permitted under article 13(2) of the PVD so as to treat the relevant supplies made by Chelmsford as carried out by it as a public authority. The FTT rejected Chelmsford's interpretation of Note 3. With the FTT's permission, Chelmsford cross-appeals against the Decision on the Note 3 Issue.
[4] By a voluntary disclosure submitted in December 2010, Chelmsford claimed repayment of VAT allegedly overpaid in VAT accounting periods between 2006 and 2010, totalling around £0.9 million. The claim was rejected by HMRC and Chelmsford appealed to the FTT. In circumstances where similar issues had arisen across the UK, this case was designated a “lead case” for England and Wales. Lead cases were also designated for Scotland and for Northern Ireland. The same three judge FTT panel was convened to hear all of these lead cases. The lead cases for Scotland (Midlothian Council [2020] TC 07910) and Northern Ireland (Mid Ulster District Council [2020] TC 07911) considered the legislation relevant to those jurisdictions. The FTT found in the relevant local authority's favour on the Article 13 Special Legal Regime Issue in both. HMRC have not appealed Midlothian. They have appealed Mid-Ulster but on different grounds not relevant to this appeal.
[5] Before the FTT, Chelmsford's first argument was that the supply of the Facilities to members of the public was not an “economic activity” such that Chelmsford was not a “taxable person” within the meaning of articles 2 and 9 of the PVD and hence not subject to VAT. The FTT found against Chelmsford on this point but granted permission to appeal. Chelmsford withdrew this aspect of its appeal shortly before the hearing before us. HMRC's appeal on the Special Legal Regime Issue, and Chelmsford's cross-appeal on the Note 3 Issue, are discrete issues and were argued sequentially before us. In dealing with those two issues in the same manner, we first address the Special Legal Regime Issue. We will set out the background law and summary of the parts of the Decision relevant to that issue before moving on to a more detailed discussion of the legal principles to be applied and whether the FTT applied those correctly.
[6] Despite Chelmsford's withdrawal on the issue of “economic activity”, articles 2 and 9 of the PVD remain relevant in that they provide the general rule against which the derogations and exemptions at issue in this case apply. Article 2 subjects the supply of services for...
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